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Regionalism's lure.

Globalism is out; regionalism is in, despite a bad rap from some pragmatists who say it could lead to a world of hostile trade blocs. On the other hand, it might just be a needed source of dynamism that can further economic integration.

Like "globalization" in the 1980s, "regionalism" has become the buzzword of the 1990s. But regionalism is a term that is overused and widely misunderstood.

Almost anyone who writes or talks about business today has something to say about how we are lurching, drifting, or dashing toward regionalism. Globalization, although no one could define it, was generally regarded as positive. But views on regionalism are much more divided. Some say regionalism results in the fragmentation of markets and countries, that it arises from resurgent tribalism and leads to a world of hostile trade blocs. Others, however, argue that regional trading arrangements, such as the Canada-U.S. Free Trade Agreement or the North American Free Trade Agreement, are a desperately needed source of dynamism in today's global economy, and that inhibitions to further economic integration can best be overcome at regional levels.

My aim in this article is to sort through some of the different meanings of regionalism, to suggest what is--and what is not--happening, to predict how these developments will affect business in the new environment of the 1990s, and to share some of Molson's experiences.

Is regionalism good or bad? As Humpty Dumpty said in "Through the Looking-Glass," "When I use a word, it means just what I choose it to mean--neither more nor less." The answer depends on what we mean by regionalism.

REGIONALISM AS TRIBALISM

This is the most threatening vision. It is a world divided into warring, hostile, ethnic blocs--a world, as one professor recently wrote, of "the retribalization of large swathes of humankind by war and blood-shed." Newspapers and TV provide all too vivid confirmation of the rise of ethnic violence in much of the former Soviet Union and parts of Eastern Europe, as well as in Africa and Southern Asia.

But we must be wary of drawing false analogies between what is going on in these places and what is happening in the nations of North America and other advanced industrial countries. Ethnicity is powerful here as well, but it is not the driving force of political change that it seems to be in Central Europe and the former Soviet Union where long-suppressed national groups struggle violently for territorial and legal autonomy. For example, many Quebecers feel a strong cultural and linguistic identity, but those who live in "Cascadia"--a new name for the Pacific Northwest--don't feel similar ethnic ties and neither do the people of the merging economic region on the two sides of the Rio Grande. Yet all three of these groups are establishing their own sense of economic autonomy within a North American community.

The bottom line is that "tribalism" does not provide a good framework for understanding regionalism in North America or Western Europe. Ethnicity counts, even in advanced industrial nations, but in Scotland, Bavaria Northern Italy, or Quebec, ethnic interests tend to align with economic interests, and economic interests create regional identity even without ethnic identity.

REGIONALIZATION OF TRADE AND INVESTMENT

We are seeing a substantial regionalization of trade and investment flows. It is no surprise that flows of goods, services, and capital have grown most within the three major world regions as trade and investment barriers tumble and as more firms enter international markets. In 1980, about 40 percent of all world trade took place within North America, Western Europe, and East Asia. By 1990, intra-regional trade had increased to more than 48 percent of all world trade.

Some aspects of these developments are especially remarkable--such as the dramatic increase in U.S. trade with Mexico over the past few years. But even more interesting is the deepening integration within regions driven by investment and corporate restructuring. Faced with slower growth and fiercer international competition, firms are restructuring rapidly in North America, Western Europe, and East Asia. Old country-based corporate organizations are breaking down, and new management systems based on highly integrated sourcing, development, production, and marketing systems now are emerging.

Research compiled by the Americas Society in New York on the impact of globalization and freer trade on the structure and strategy of U.S. companies in North America suggests how far this process of continental integration has advanced. A survey of some 25 U.S. Fortune 500 manufacturing firms shows that almost two-thirds already have created or are now putting in place a North American focus on their structure and strategy. An additional 25 percent say they likely will move in this direction in the near future. Most have established some sort of North American structure, typically by integrating U.S. and Canadian sourcing, production, and marketing networks.

This regional focus is taking place in North America, in Western Europe, and increasingly in East Asia. The result is a different--"deeper" or more "structural"--integration than that produced by trade. The complex, cross-border networks now emerging as a result of corporate restructuring erode national borders and the capacity of central governments to manage national economies.

BUILDING BLOCS

Many fear regionalization of trade and investment will lead to the formation of inward-looking, protectionist regional trade blocs. Isn't the formation of NAFTA, they argue, a giant step toward restructuring the world economy into Fortress Europe, Fortress NAFTA, and a new Greater East Asia Co-Prosperity Sphere?

The answer: Protectionism and trade wars between regional blocs are potential dangers, but they are scarcely inevitable results of the regional growth of trade and investment.

It is true that regionalization is increasing, but not necessarily at the expense of linkages with other regions. Regional agreements have encouraged new trade and cross-border investment by firms that have tended to see themselves as too small for substantial international ventures. This is a simple net gain.

Moreover, many firms--particularly the larger multinationals--are deepening their regional bases and extending their global ties. Indeed, this effort by the world's largest firms to develop strong "insider" bases in North America, Europe, and Asia provides one of the strongest counterforces to inward-looking regionalism.

In a report on "The Future of Regionalism" sponsored by the Center for Strategic and International Studies in Washington, we noted that the uncertain interplay between global and regional forces gives rise to two contrasting perspectives. While "multilateral purists" contend that the global economy easily could founder on regional protectionism, "regional pragmatists" argue that the pursuit of regional options can be fundamentally compatible with global integration. As perhaps the best-known regional pragmatist, Paul Krugman, observes in International Organization, "Regional free trade agreements will do more economic good than harm; and the problems of the GATT are so deep-seated that it is unlikely that a world without regional free trade agreements would do much better."

Regional agreements such as the Canada-U.S. FTA and NAFTA meet GATT requirements on openness. These agreements have not derailed the process of global trade and investment liberalization. Indeed, many experts feel regional trade and investment relationships can serve as a new source of innovation for trade liberalization.

For example, the trade dispute settlement provisions of the U.S.-Canada FTA and NAFTA, constitute an impressive innovation, well in advance of GATT's dispute resolution mechanisms. But this innovation and the erosion of sovereignty it implies were acceptable to the parties only within the context of the wider economic and political objectives of the Free Trade Accord. Another example: The European Community's "mutual recognition" policy makes possible cross-border business activities which involve complex regulatory requirements. Clearly, mutual recognition would not be acceptable on a global basis. It is acceptable within the context of the wider commitment to establish the European Single Market.

We are all too aware of the danger that Washington, Brussels, and Tokyo will escalate trade and investment controversies into full-scale regional trade wars. But the regionalization of trade and investment does not make this inevitable or even, I believe, more likely. The need for effective leadership in the global economy is not lessened, nor is it made impossible by these developments. Moreover, in the absence of effective multilateral institutions, regionalism-based liberalization may be the best second choice. In this sense, regions may serve as laboratories for experimentation in trade and investment policy liberalization--and support, not diminish, globalization.

REGIONAL GLOBALISM

This is a more recent spin on the term and takes the regional pragmatist's view to its logical conclusion. If the GATT Uruguay Round collapses, there will be a desperate need to create a successor international trade organization.

Because there are too many players at the table or because the issues have become too complex to be worked out in the traditional GATT format, a number of specialists feel it might make sense to use regional groupings as the basis for a post-GATT international trade organization. Instead of 100-plus members of GATT, a new international trade organization might consist of three to five larger regional caucus groups.

This radical solution would dismay many of the strongest supporters of multilateralism. But what these arguments make clear is that it is increasingly difficult to view globalism and regionalism as opposing and contradictory forces in the world economy. Similarly, it is pointless to suggest there is a clear alternative between one and the other. The emerging world economy will be shaped by these two powerful and linked forces, by the interplay between global and regional developments. Neither markets nor production systems will be defined by national borders in the coming decades. They will be both larger and smaller, and the drive toward deeper regional integration is unlikely to be halted.

REGIONALISM WITHIN COUNTRIES

Another definition of regionalism is also of rapidly growing importance. As markets break out of national borders, and as European, North American, and Asian trade and investment ties deepen, smaller regions within countries or regions that cross national borders are becoming increasingly active and important players in this new international arena.

This sometimes is viewed as "tribalism," but I think that's a mistake. What political scientists call "subnational" regionalism is driven in the advanced industrial world far more by economics than by ethnicity.

What is emerging in North America, and I think in Western Europe and in parts of Asia as well, is a much more complex system of government made up of multiple layers of authorities. In North America, states and provinces, individually or in concert--even across borders--are taking more active and autonomous roles in global markets. We see this most visibly as states and provinces compete (often, it seems, with excessive vigor) for foreign investment or seek to stimulate exports by local companies.

Some regional leaders have taken Harvard Business School Professor Michael Porter's advice to heart and have tried to create "clusters of excellence" that will provide firms based there with global competitive advantage. They see smaller regions as the key players in tomorrow's global economy.

Although the underlying thrust toward this kind of regionalization is powerful, efforts to institutionalize these developments are thus far tentative and uncertain. Yet in Canada, as in other advanced nations, there is a strong movement toward regionalism within the country. Whether it is the Quebec Government's commitment to create a number of provincial clusters of excellence, Ontario Premier Bob Rae's vision of his province's future in a "Great Lakes economic region," or the advocates of a self-conscious Cascadia in the Pacific Northwest, it would be unwise to overlook or underestimate the power of these ideas.

We begin to see a 21st century economic geography emerging, based less on national trade, investment, and industrial strategies than on smaller regions and their ability to mobilize an array of resources and become players in continental and global markets. In a recent New Pacific article, James N. Gardner, chairman of the International 1994 Conference of World Regions, writes, "In short, the region that develops a successful strategy for reconciling the seemingly contradictory forces of globalism and regionalism stands poised to acquire a profound competitive advantage in the decades ahead."

FORWARD-LOOKING FIRMS

Notions of an emerging "borderless economy" or of a trend toward "stateless" corporations now seem naive. Firms are learning instead to live in a far more complex environment composed of a growing number of overlapping and competing authorities--local, regional, national, and supranational.

Let's look at Molson Breweries and see how we are adapting to this new world.

In Canada, Molson controls over 50 percent of the market for beer. We will fight for a few more percentage points in our domestic markets, but substantial growth will come from outside Canada.

Our objective is to become a significant player in global beer markets. To succeed, we must build a more substantial base. Alone--despite the quality of our product--we are unlikely to gain a major share in the largest foreign markets. We can be a successful niche player, as we are in the U.S. and other countries, but we are not large enough to push into the biggest market sectors. Licensing arrangements are useful, but they are insufficient to ensure future long-term global growth.

Logic dictated we think of a North American base. We decided that for a Canadian brewer to ensure its growth and to guarantee survival in the global brewing industry, it would have to become a North American player. Toward that end, Molson created a strategic alliance with Miller Brewing Co. that makes our products truly North American. For the first time, a Canadian beer brewed in Canada will receive the support necessary to compete with major brands in the largest beer market in the world.

Our North American strategy isn't inward-looking, or based on a belief in the emergence of a regional trade bloc. Rather, our strategy is rooted in the realities of competition and expansion, in the proximity of the U.S. market, and in our ability to construct an alliance with an American partner. Our strategy positions us to attack global markets with greater prospect of future success.

A BRAVE NEW WORLD

Today, we are witnessing the breakdown of institutions and arrangements that have anchored the world economy since the end of World War II. The linked pressures of technological innovation, economic integration, and competition are restructuring the basic architecture of the world economy. The role of the nation-state in the advanced industrial world is changing, and sovereignty is being unbundled both upward, to wider regional groupings such as NAFTA or the European Community, and downward, to smaller regions such as states and provinces. Companies must learn to operate in this new, complex environment, and to realize that global, regional, and local strategies are not antithetical, but rather must be complementary and mutually beneficial.

Marshall A. Cohen is president and chief executive of The Molson Cos. Ltd., a diversified Canadian public company based in Toronto with three principal activities: brewing, cleaning/sanitizing, and retailing. He is the former Canadian deputy minister of Industry, Trade, and Commerce, Energy Mines and Resources, and Finance, Government of Canada; board director, AIG, and Toronto-Dominion Bank. Cohen is also chairman, International Trade Advisory Committee, Government of Canada; international councillor, Washington-based Center for Strategic and International Studies.
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Title Annotation:Trade; regionalization of trade and investment
Author:Cohen, Marshall A.
Publication:Chief Executive (U.S.)
Date:Jul 1, 1993
Words:2523
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