Case gives clarity on the incorporation of standard terms. Credit: 3D Animation Production Company, Pixabay

From unified globalisation to regional clubs

The global economic landscape is undergoing a dramatic transformation, shifting from the unified globalisation model of the 1990s to a more fragmented system characterised by regional alliances and competing blocs. This shift, highlighted by Gilles Moëc, chief economist at AXA Investment, in a recent World Economic Forum article, is reshaping trade, finance, and geopolitical relationships, presenting both challenges and opportunities for international shipping businesses.

Moëc argues that the world economy is “splitting into competing groups instead of a single connected system of globalisation”. This fragmentation, however, doesn't necessarily spell the end of cross-border trade. Instead,

global companies are adapting by reorganising their supply chains around “clubs” of countries with shared values or security concerns, a trend Moëc terms “clubification”.

This approach allows companies to mitigate some of the adverse effects of fragmentation, such as inflation and lower efficiency, “as long as clubs include both low-wage nations and high-spending economies”.

Alongside these clubs, the concept of “connector countries” has emerged. These neutral players, like Mexico and Vietnam, act as intermediaries, facilitating trade between the different blocs. This “rejig” of globalisation, though diluted, can help keep global commerce flowing.

The transformation extends beyond trade to encompass global financial flows. Moëc points to the changing dynamics of how the US funds its fiscal deficit as a prime example. The early 2000s saw the rise of “Bretton Woods 2.0”, a concept centred on the financial interdependence of China and the US. China, using its current account surplus, invested heavily in US government bonds, creating a financial solidarity intended to prevent geopolitical tensions from escalating. This arrangement also helped keep US interest rates low, offsetting some of the impact of manufacturing job losses to China.

 

Soured relationship

However, this financial interdependence has waned in recent years. “Over the last few years, however, China has been cutting back its investments in US assets while investors from countries politically and militarily aligned with the United States have increased theirs,” Moëc said. The US, through its protectionist policies, has ensured the funding of its deficit through its allies, while China has redirected its capital flows into emerging markets, particularly in Africa and Latin America, fostering South-South financial links.

Even this revised version of globalisation faces challenges.

Connector countries can be viewed with suspicion, potentially seen as “Trojan horses” that allow geopolitical rivals continued market access.

The tightening of rules of origin under the United States-Mexico-Canada Agreement during the Trump administration exemplifies this concern. These rules, designed to prevent China from circumventing trade restrictions by relocating production to Mexico, highlight the increasing focus on controlling trade flows within regional blocs. “These rules determine where a product must be made to qualify for preferential trade treatment. It served to close a loophole where China could have merely displaced its production to Mexico to benefit from preferential access to the US market,” Moëc said.

The complexities extend to other trade relationships as well. While a free trade agreement between the US and the EU remains elusive, their strong political and military ties have traditionally ensured stable trading conditions. Moëc suggests this could change, further destabilising the global trade landscape.

 

Old divisions 

Divisions also exist within the Global South. While groups like BRICS aim to institutionalise co-operation, “old geopolitical and economic rivalries are getting in the way”, Moëc noted. The strained relationship between China and India, with India positioning itself as a potential alternative to China, illustrates this tension. Furthermore, some emerging economies, like Indonesia, are implementing tariffs on Chinese goods to protect domestic industries.

In the financial sphere, regulatory divergence, particularly in sustainable finance, could further fragment the Global North. Moëc notes that “some European financial institutions cannot operate with pension funds in some US states because they apply a sustainability filter to their investments as per EU regulations”. Similarly, China has been reducing its investments in Africa due to payment difficulties, further fracturing South-South financial connections.

Looking ahead, Moëc suggests that global companies can no longer rely on the stability of these regional clubs.

“Full-on fragmentation, with its uncertainty, is now a real risk, with adverse consequences in terms of global price levels and efficiency.” However, he also notes that a hybrid model is possible. This model would see the co-existence of the two dominant blocs – one centred on the US, the other on China – alongside a looser alliance of countries adhering to the traditional multilateral framework of globalisation. “Signs of this have emerged in recent agreements concluded between the EU and the South American trade bloc Mercosur or the rapprochement between a post-Brexit United Kingdom and the EU.”

This hybrid model, though demanding agility from global companies, offers a more palatable alternative to complete fragmentation. Countries like Canada and Mexico, for example, could remain within the US bloc while simultaneously strengthening economic ties with the EU and Mercosur. Ultimately, this nuanced approach may represent the most viable path forward in a world navigating the complex realities of a fragmented global economy.