William Alan Reinsch, Senior Adviser and Scholl Chair in International Business, at the The Center for Strategic and International Studies (CSIS) provides a working definition and framed some the core characteristics of what he calls “trade clusters”.  Trade Clusters are yet another development in the way globalization transformed over the course of 2023.

Here, we add Reinsch’s analysis as another case study of “globalization transformed” – wherein we framed our core hypothesis over the course of 2023: Is Regionalization the Future of U.S. Strategic Advantage?  

Background 

Trade clusters are another direct response to lessons learned by:

• The scarcity and supply chain disruptions induce by the Covid 19 pandemic;
• varying public health policies worldwide in response to the pandemic; 
• Regional surges of the virus which impacted the operations of crucial hubs of globalization and global trade,  – massive in scale and volume – like Shanghai, China, Ningbo-Zhoushan, China, Shenzhen, China, Guangzhou Harbor, China, Busan, South Korea, Rotterdam, The Netherlands and the ports of Long Beack and Los Angeles in the U.S.;
• Unrelenting theft of intellectual policy, design schematics, and manufacturing design data by nation-state adversaries and non-state actors alike; 
• The role of export controls and sanctions in the Ukrainian conflict and now in the Middle East conflict: and 
• The growth of kinetic and cyber attacks that are deployed through weaponization of IT supply chain vulnerabilities. 

According to CSIS’ Reinsch, Trade Clusters are formed as “the growth of trade within geopolitical blocs increases and the decline of trade across blocs” decreases.  Trade Clusters are essentially a reformulation of globalization  – what some are calling deglobalization – and the alignment of trade policy with foreign policy, national security alliances, and domestic national security concerns.   

Trade Clusters

This is an interesting twist in the argument over whether or not the world is de-globalizing. It appears that we may not be de-globalizing as much as we are “clustering,”…into blocs of more or less like-minded parties, suggesting that trade is following politics.”

CSIS Reinsch offers the following as an introduction to his larger commentary on trade clusters: 

“The World Trade Organization (WTO) “recently published its annual trade report, this year titled, World Trade Report 2023 – Re-globalization for a secure, inclusive and sustainable future. This is always a very useful report packed with interesting information and factoids. This year, Ed pointed out one particular conclusion—the growth of trade within geopolitical blocs and the decline of trade across blocs. This excerpt from page 32 of the WTO report summarizes the situation:

“The analysis shows that despite reaching record highs recently, since July 2018 bilateral trade in goods between China and the United States grew on average much more slowly than the trade of each economy with other partners (Blanga-Gubbay and Rubínová, 2023).

On a broader scale, there are the first signs of trade reorientation along geopolitical lines, indicating a shift towards friend-shoring. . . . As a result, goods trade flows between hypothetical geopolitical “blocs” have grown 4-6 per cent more slowly than trade within these blocs (Blanga-Gubbay and Rubínová, 2023). . . . FDI flowing to and from emerging and developing economies is substantially lower for more geopolitically distant partners (IMF, 2023). . . . Fragmentation in FDI along geopolitical lines could therefore be a sign that similar developments may occur in global trade flows in the future.”

“It remains to be seen whether political clustering will persist and whether it will ultimately end up dividing the world into two or more blocs, each of which has very little to do with the others.”  

it also seems that some of this change is due to companies simply reassessing the risk of doing business in difficult countries that have become more hostile in recent years. China, for example, has been sending decidedly mixed messages, verbally welcoming trade and investment while simultaneously raiding Western corporate offices, harassing companies and not letting their executives leave the country. Under those circumstances it is no surprise that companies are looking for more sympathetic locations.

When U.S. companies consider where to invest, they usually search for countries that operate according to rule of law, maintain policy stability, and have a commercial dispute resolution process that is transparent, objective, and efficient. (An exception is companies in the natural resource sector which naturally are forced to invest where the resources are.) These are not black or white criteria—they exist on a sliding scale—but countries that score low on that scale find attracting Western investment more difficult.

Reinsch concludes:  “It remains to be seen whether political clustering will persist and whether it will ultimately end up dividing the world into two or more blocs, each of which has very little to do with the others. That would be a blow to globalization, but at this point it seems to be more a case of simply changing partners”.

What Next? 

Allies and partners can now think about policy which strengthens regional trade clusters as a function of mitigating national security risks and threats – and maintaining technological opportunities for advantage through a secure intermodal supply chain providing secure hardware components crucial to emerging technologies like AI and Quantum – including the chips on which it all runs.     

From a cybersecurity perspective, trade clusters are a response to the weaponization and disruption of the global IT supply chain (especially semiconductors, the large scale machines used to produce semiconductors and the sourcing of component parts and outsourced software development).  This weaponization is made easy because while globalization made labor and the cost of goods cheap, enabling a commoditized, just in time supply chain for global goods and services.  it erased any ability to maintain quality and/or provenance – or to combat theft and espionage or counterfeiting or human trafficking or wholesale narcotics production and distibution via uninspected intermodal containers. The container inspection rate at the port of Los Angeles, for example, is a meager 4%. Forget illegal goods – the real risk with that low an inspection rate is the worst case scenario of a dirty bom or pathogen coming into Los Angeles County and Southern California via a container.    

In the last fifty years, all organizations were able to take advantage of these economies of scale – especially the bad guys, in what has been coined “deviant globalization” or the “dark economy.”   Are trade clusters one of many new design elements of global trade that will actually have an impact on these intractable problems symptomatic of the downside of globalization and its woes?  2024 will tell.   

For OODA Loop News Briefs and Original Analysis on Globalization transformed, regionalization and regional innovation, see:

Globalization Transformed |  Regionalization  |  Regional Innovation