Global Regional Trade Alliances
Allow me to set a proper context for the motivation behind this post.
I like the title of Duke University Professor Dan Ariely’s book, Predictably Irrational. It makes us wonder why smartest individuals on earth engage into self-defeating behavior, irrational choices, and make enormously consequential bad decisions. We see that repeatedly played out in mega mergers and acquisitions, approximately two-thirds of which do not pan out as projected. Are these simply acts of leaders pursuing their self-interest or engaging in predictably sure-fail, value-destroying megalomaniac grandiose designs?
In 1999 Cisco and Lucent faced a major decision to acquire expertise of International Network Services (INS). Cisco had an admirably successful strategy of partnering rather than acquiring major related operations. Lucent at the time was in acquisition and merger spree, purchasing one after other businesses worth billions of dollars, and predictably purchased INS for reportedly $3.7 billion. Cisco stayed committed to its core values and continued with its partnering strategy. Cisco is thriving; Lucent no longer exists. If smartest people in business fail to integrate acquired businesses, what were smart European leaders thinking when they envisioned their currency (euro) merger? Wasn’t that decision close to mega corporate mergers, involving cost-prohibitive integration of vastly different cultures, values, and aspirations, which predictably fail in most cases?
The Clash of Civilizations vs. Ideas – Samuel Huntington Revisited
Humanity is incredibly ingenious and resilient; it has persevered through indomitable will despite periodic havocs inflicted upon it by ill designs of some despotic leaders, devil-possessed, or evil-inspired, or simply by the forces of nature, Providence.
Humans and humanity also seem to travel a highly predictable path. Those endowed with exceptional accumulated energy, inherited resources acquired over generations, and talent aspire to gain greater and greater power and dominance in the quest for ascending to the so-called “commanding heights;” eventually falling, predictably, from their self-destructive behavior, excesses; their rise and ideas consequently discredited by the calamitous fall; a new crop of leaders swarms in armed with supposedly different and more meritorious ideas, and the self-reinforcing circle repeats, infinitely.
And finally, humanity is inexhaustibly, indefatigably ingenious in devising ways to coalesce and segregate. Samuel Huntington, a brilliant visionary, envisioned in his seminal 1993 article, The Class of Civilizations, published in Foreign Affairs magazine (later expanded into a book, entitled, The Clash of Civilizations and the Remaking of World Order) that we are finally done with global clashes and wars based on narrow nation state interests or grievances, ideological underpinnings (capitalism vs. communism; democratic vs. authoritarian rule; religious subdivides); that the humanity would coalesce along broader civilizational lines and the future global clashes would be along these civilizational fault lines. He conceived of seven to eight such civilizational fault lines: Western, Confucian, Islamic, Hindu, Slavic-Orthodox, Latin American, and possibly African. Huntington (1993) sums up in a follow up rebuttal:
“Faith and family, blood and belief, are what people identify with and what they will fight and die for. And that is why the clash of civilization is replacing the Cold War as the central phenomenon of global politics, and why a civilizational paradigm provides, better than any alternative, a useful starting point for understanding and coping with the changes going on in the world.”
I agree with Huntington that humanity should eventually rise to thinking along broader civilizational lines. But it is nowhere near that yet and there are numerous countervailing forces motivated by narrow self-interests and resurfacing ideologue divides (e.g., class warfare) working against it. More importantly humanity lately has not produced leaders of such stature and bandwidth who can mobilize citizenry along civilizational lines devoid of overpowering self-interests of narrow constituencies.
Alternative to the Clash of Civilizations – Global Intraregional Trade Alliances?
So until humanity rises up to the world order envisioned by Huntington, can we manage with more practical, pragmatic alignment strategy? For example, it is not my prediction but hope that the world coalesces firmly along the lines with four principal regional trade alliances:
- North America (United States, Canada, and Mexico; 3 countries)
- European Union (27 countries)
- China and Asian Tigers (5 countries)
- Japan and India (2 countries)
The idea of regionalization of global trade coexisting with rise of globalization is not too farfetched. As shown in Graph 1, we notice a trend towards increasing regionalization of trade. Over 50% of trade within the three key regions is intraregional. EU-27 will show even a stronger regionalization.
Source: Deduced from IMF data at, http://www.imf.org/external/pubs/ft/survey/so/2008/car02608a.htm
Let’s now return to the hoped-for regional trade alliances. For all practical purposes, the listed first three trade alliances are already informally in place. Graph 1 shows the movement towards increasing trade among alliance partners. Table 2 shows correlation of the GDP growth rates (1993 – 2010) among the trade partners – an indication of increasing regional partnership. The correlation is strongest among the European Union partners, followed by the North American and China-plus-Asian-Tigers alliances, and weakest between Japan and India.
In terms of the size of economies, in 2010 we start with North America regional trade partners in the dominant position with $17.398 trillion in GDP. But in 25 years, if all goes according to the assumed parameters, we end up with China-plus-Asian-Tigers in strong dominant position. This group, under the stated assumptions of future growth rate, is projected to have $61.88 trillion in GDP in 2035, about 48% higher than each of the other three alliances. The other three groups are projected to have about the same size of economies in 2035.
It is interesting that the each of the four alliances is paired with yesterday’s strong performers, but spent forces, with today’s emerging countries. If these assumptions hold true, the world has to forget the acronym BRIC and get used a new one: HKSTC (let’s dub it Hockey Stick), which stands for Hong Kong, Korea, Singapore, Taiwan, and China.
One question in our mind is why did we pair Japan and India. For the following primary reasons, I believe that it could be one of the most innovative trade alliances of 21st century if highly risk-averse bureaucratic elite of these two countries step outside the box and envision mutual benefits of an unimagined scale:
- India gets access to Japan’s technology, FDI, and learn from Japan’s prowess in exporting and trading.
- Japan gets a loyal trade partner with access to a rapidly growing economy, fast growing middleclass, business related to building enormous infrastructure, pool of talented scientists, engineers, and entrepreneurs.
- While population of Japan and other trade alliance partners is aging, India has the youngest population with larger potential for the so-called “demographic dividend.”
- India starts with low labor productivity and thus has a greater potential for increase in productivity and economic growth rate by incremental addition of other factors of production (investment and technology).
- India is a chaotic but functional democracy that allows ongoing release of tension and pressure; it is an insurance against widespread periodic bloody revolutions (at the expense of slow-moving decision process).
- Both Japan and India are U.S. and West-leaning democracies.
We conclude by taking a note again of emergence of China and Asian Tigers as a formidable, unbeatable trade alliance of the 21st century. The leadership of these countries is strong, smart, and seasoned to unmistakably appreciate enormous benefits of such alliance. Mergers are messy (CISCO realized that; Lucent did not); majority of them fail. Alliances, although require ongoing efforts to build trust and loyalty among partners, are much easier and less costly to manage.
Will the multipolar world order along the civilizational fault times envisioned by Huntington ever materialize? Will global leaders remain mired in problems at home for next 10 to 20 years and cling to their narrow domestic constituencies and thus issues of world order are left to chance or emerging future crises? In the meantime a four-polar global trade alliance model of ultimately equal size groups appears a more practical emerging scenario at least in the global trade arena. Is that model portable to the global politics?
Questions remain. Lion is a territorial species. Can it learn to share the mountaintop?
It is all about leadership.
- Sources of labor productivity:
- China and India: Extrapolated from Asian Productivity Organization – APO
- Other countries: Conference Board Total Economy Database: Year 2010.
- 2010 Mean Age is population weighted.
- 2010 Average Regional GDP growth rate is PPP GDP weighted.
- 2010 Labor Productivity (PPP GDP per Labor Hour) is GDP weighted average.
- 2010 PPP GDP and Population: Extrapolated from the Penn World Table Version 7.1.