TRADE VIEW

Business in the time of regional trade agreements

Intraregional commerce pacts are nearly ubiquitous now, but other forces can be more potent drivers of growth.

For the past three decades, regional trade agreements (RTAs) have had quite a growth spurt. As of January, the World Trade Organisation (WTO) had received 446 notifications of RTAs regarding goods and services, 259 of which are currently in effect. The growth of RTAs is part of the reason why the whole notion of globalisation is being widely reconsidered - but their impact on businesses will likely be mixed.

“The whole concept of a globalised world is being reassessed from a risk perspective,” says Carol Fox, Director, Strategic and Enterprise Risk Practice, Risk and Insurance Management Society (RIMS).

Despite impressive growth numbers, RTAs are not universally embraced. According to the Organisation for Economic Co-operation and Development (OECD), regionalism in trade leads to a patchwork effect between members and non-members within the region concerned, and can raise transaction costs as a result. There is also a point of view that RTAs undercut Bretton Woods-inspired open markets and world financial order.

From the WTO’s perspective, the adoption of RTAs requires careful consideration, at the very least. “In some cases [RTA] negotiations are between parties that account for very substantial shares of world trade and GDP,” says WTO Director-General Roberto Carvalho de Azevêdo. “And often these initiatives exclude the smallest and most vulnerable countries, and do not fully address the gains from trade that can be obtained through global value chains. Therefore, while we welcome RTAs, we cannot ignore their obvious limitations or the need to avoid harmful effects to third parties.”

When the value chain generated by a city-state reaches a certain size, borders begin to disappear through regional cooperation and adaptation. - Diederik van Wassenaer, Global Head of Network, ING Commercial Banking


Reality of RTAs for businesses
The growth of RTAs is, of course, driven by the belief that they will stimulate development and growth among the participating countries. With access to larger markets, for example, the volume of production can be stepped up, reducing costs and improving the international competitiveness of member countries over non-members. And, in theory, when countries are linked by RTAs, it becomes easier to pursue joint projects affecting several nations (think infrastructure), which can boost economic development.

RTAs, however, don’t exist in a vacuum, and the signing of an agreement doesn’t create the instant harmony that a region needs to act as a single entity. “In many of the places where RTAs exist, there is a history of complex underlying tensions,” says Diederik van Wassenaer, Global Head of Network, ING Commercial Banking. “Differences in beliefs, tensions over debt, political disagreements—these tensions can undermine the effectiveness of any agreement, so they benefit some countries more than others.”

To van Wassenaer, trade is a reflection of the rapidly evolving world we live in, and trade agreements and governments are hard-pressed to maintain pace. “The world is a smaller place to do business today than it ever has been,” he says. “It’s less expensive to fly today than it was 40 years ago, and you can fly around the world in 24 hours. You can communicate instantly, and get yourself anywhere rather quickly. As a result, events move faster than any attempt at regulation can keep up with—and you’ll see this in trade flows, as well. Trade agreements protect and regulate trade flows, but trade will proceed around and over them. Things move too fast for it to be otherwise.”

 
True drivers of regional growth
Whatever potential impact RTAs have on redefining or moving away from globalisation toward “hubonomics,” van Wassenaer sees the growth of city-states as having tremendous potential to break down trade barriers, because they are where the value chain is enriched. “The economics that emerge from huge city-states and grow outward have a dynamic of their own,” he says. “Logistics and quality are necessary to produce goods that people want to consume, and cities are where the critical mass for production and consumption occurs. And as city-states grow, things around them become better organized, such as agriculture. Over time, where most people were once struggling to survive, many become enabled to spend money on more things to live. When the value chain generated by a city-state reaches a certain size, borders begin to disappear through regional cooperation and adaptation.”

Companies seeking to take advantage of the emergence of such vibrant cities can consider a hub-based strategy that provides a variety of shared resources and services to local operations. So, for example, while it might be difficult to justify the expense of certain widgets needed by one hub, an interconnected network of hubs sharing resources and knowledge can create efficiencies and economies of scale. Many businesses that are considered successful global enterprises adopted a hub approach to business long ago because they realised that geographic and other distinctions were not erased by the rise of globalisation. If anything, regionally focused strategies, in unison with local and global networks, can significantly boost a company’s performance.

 

(This article is produced in cooperation with Bloomberg Custom Content.)

 

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The View is the online magazine of ING Wholesale Banking