Drivers of regionalisation and localisation in trade

One of the most important findings from Economist Impact’s 2022 Trade in Transition programme is that, in response to pandemic-related supply-chain disruptions, companies are predominantly diversifying their supplier bases rather than regionalising or reshoring. In a survey conducted among 3,000 executives worldwide, 48% of respondents chose diversification regardless of location as their primary reconfiguration strategy, whereas only 12% of respondents said they were primarily regionalising and 5% said they were reshoring (see Figure 1).

But despite this, given anecdotal evidence of reshoring amid pandemic panic, factors that could drive regionalisation or localisation are worthy of consideration. We discuss three main factors in this article.

First, the rise of regional free-trade agreements, including the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the Regional Comprehensive Economic Partnership (RCEP) in Asia Pacific and the United States-Mexico-Canada Agreement (USMCA) in North America could make working with regional suppliers and customers more attractive. For instance, it could become cheaper to import raw materials tariff-free from within the region than from a country outside it. As such, these regional agreements could incentivise companies to search for suppliers as well as customers closer to home, driving the regionalisation of trade.

Regionalisation could also be accelerated by the weakening of the World Trade Organisation (WTO) as a forum for enforcing existing trade rules and regulations. If companies engaging in international trade are unable to rely on the WTO for the expedient resolution of trade disputes, it may drive them to work within regional FTAs, where potential disputes may be arbitrated by other bodies regionally.

Finally, shifts in manufacturing technologies may drive localisation. One is micro-manufacturing, that is, manufacturing on a smaller scale closer to the end market. BioNTech, a German pharmaceutical company, has reworked its covid-19 vaccine manufacturing processes to fit into a shipping container. The company plans to distribute these factory kits across Africa to increase vaccine access on the continent.¹ This would decrease imports of vaccines into Africa but may increase imports of pharmaceutical ingredients. 3D manufacturing can also enable components to be printed on site, which could change sourcing patterns of raw materials dramatically. Applications of 3D printing in the automotive sector are explored in our Trade in Transition 2022 programme under the heading “Sector deep dive”.² There are still limits to the feasibility of these technologies, given their dependence on the availability of inputs, among other factors, but if they were adopted on a large scale, this approach could have the potential to alter trade patterns.

Does this mean that globalisation will proceed apace or that it will become more regional or local? The economic rationale for exchanging goods and services between locales where they are abundant, cheap and in supply and those where they are costly and in demand is unlikely to change. Economist Impact’s position is that this should apply regardless of location. But without adequate global trade governance, companies may retreat to the shores they know best.