Introduction

National economies have become, over the past half century, radically more integrated. The process of international economic integration is viewed by many as being global (hence the term “globalization”). In this chapter I will argue that regional economic integration – regions here in the sense of sub-continental mega-regions, such as Europe and China – is likely to eclipse global integration in coming decades.

Before going further, it is necessary first to unpack the term “international economic integration” which, if it can be considered a single phenomenon at all, is certainly one of many distinct dimensions. A simple categorization of dimensions includes (1) trade in goods and services; (2) the organization of production processes across borders – something that requires trade, but also requires far more by way of cross-border corporate activity than simple trade does; (3) production in multiple countries by multinational corporations (MNCs), which requires international capital flows in the forms both of foreign direct investment (FDI), and eventual repatriation of profit or disinvested capital; (4) the international mobility of capital for other purposes; (5) the transmission of economically useful knowledge – scientific discoveries, new technologies, designs, business know-how – through the activities of MNCs, through migration, licensing, or simple copying, and through various forms of public information dissemination (publishing); (6) migration in various forms – for work, study, or tourism, legal or illegal, permanent or temporary. Each of these dimensions may be understood both in terms of activity (e.g., trade), and of institutions (e.g., rules governing trade and trade barriers). Finally, and central to the argument of this chapter, these dimensions can manifest on different geographical scales: “international” can range from integration with a single neighboring country, to throwing one’s doors open to the world.

Seen thus, it becomes difficult to say simply “international economic integration has increased (or decreased),” because it may increase in one dimension while decreasing in another; or it may increase globally in trade but regionally in production or migration. It is therefore necessary to refine the thesis stated above: global integration will be increasingly concentrated in the transmission of knowledge, while the integration of production, and direct investment, will be largely regional phenomena.

To establish this, we need to consider first how technology provides means and motive for international economic integration. Here we need to distinguish between the effects of particular technologies, and the effects of technological change itself.

Particular technologies – containerization, jumbo jets, the Internet – are distance-shrinking, and because of this they facilitate international integration. Once such a technology has been invented and adopted, it can help sustain a certain level of integration even if the technology changes no further.

The ongoing process of technological change creates new differences in what is known in one place and another. Most international economic integration can be understood as a response to these differences in knowledge. Comparative advantage, which motivates trade, is largely rooted in differences in knowledge. Modern trade theory (the “new” trade theory of the 1980s and after) explains trade in produced goods and services between countries at similar levels of development in terms of localized increasing returns, which are in turn rooted in locally sticky knowledge – learning-by-doing, local knowledge spillovers, organizational capabilities. The older Heckscher–Ohlin theory located national comparative advantage in different levels of development; in simple formal terms, this meant different capital to labor ratios (high in rich countries, low in poor ones), but modern understandings of that theory would locate much of the difference in the quality, experience, and accumulated knowledge of the labor force – human capital. Only when comparative advantage is entirely a product of natural endowments – Ecuador has a comparative advantage in bananas, Kuwait in oil – do differences in knowledge cease to be an important motivation for trade.

Cross-border production networks allow comparative advantage to be realized on a more fine-grained basis – it is now necessary to have a comparative advantage only in one stage of production, rather than the entire product. Such networks require management, which is provided by MNCs. Most of what the MNCs bring to this process is, again, knowledge: knowledge of markets, production processes, or management methods (see this volume, Ietto-Gillies, Chapter 6 and Iammarino and McCann, Chapter 14).

MNCs, however, have a much bigger role in the generation and transfer of knowledge than what is needed to coordinate cross-border production. They develop new products and processes, and they carry that knowledge across borders – often, to set up production in foreign countries. Such ventures then require considerable international capital flows, and in particular FDI. MNCs invest in foreign operations – in short, they exist as an MNC – largely to profit from knowledge they have, or to profit from the acquisition of knowledge in the foreign country. Knowledge the MNC has may take the form of organizational competencies or of intellectual property. The former is the firm’s collective know-how, the visible hand capabilities of its organizational hierarchy (Chandler 1977, 1992). These competencies may enable the MNC to produce, even in a foreign environment, at a lower cost than its competitors. Alternatively, the MNC may enter a market to preserve or extend market power, by preventing the emergence of competitors – that is, firms with comparable competencies – and by protecting its intellectual property by keeping functions internal. And, finally, MNCs locate their investments – in particular, R&D facilities and joint ventures – with the strategic aim of acquiring knowledge from other firms (Cantwell and Iammarino 2001, 2003).

Commercially useful knowledge, of course, gets transferred in other ways as well: designs and methods are reverse engineered; academic papers are published; patents are filed, and then read by others; knowledgeable workers migrate; programmers from around the world collaborate on open-source software. Just as we understand large elements of international economic integration as responses to differences between countries in what is known, we regard the use of these varied mechanisms to spread or share knowledge across borders, as forms of international economic integration.

At what scale, geographically, does integration take place, and at what level is it governed? Global? National? Something in between? The answers lie in countless choices of policy, and of institutional design, which affect the scale of integration: trade barriers, rules governing international investment, technical standards, intellectual property, and so on. The central arguments here are two, one concerning the properties of global and sub-global economic governance, and the other the implication that those properties have for the timing of their adoption. First: global integration tends to be institutionally minimalist, such as we see reflected in simple World Trade Organization (WTO) market liberalization. Economic processes integrated at a sub-global level can be associated with deeper, more robust, and (potentially) more accountable regulation. Second: following a shock which leads to a restructuring of the institutions governing economic integration, the institutional simplicity of global integration allows for relatively rapid adoption, but global integration will be rolled back as sub-global integration progresses. Global integration is the hare, regional integration the tortoise.

Large markets offer economic advantages – notably, an elaborate division of labor, and competition even in the face of considerable returns to scale. Since the division of labor becomes more elaborate as economic development progresses (Jonscher 1994; Smith 1991), and since distance-shrinking technologies reduce the costs of operating in large markets, it is often argued that the appropriate scale for most forms of economic integration has become global, and that economic governance should be global as well. Yet others see advantages to regulating markets at sub-global levels, and sub-global regulation generally limits global integration.

One way to approach the question of what level of governance is Rodrik’s formulation of “the inescapable trilemma of the world economy” (Rodrik 2007). He argues that the nation-state, deep global economic integration, and democracy are not simultaneously possible. For nation-state, we can read any sub-global sovereign entity. Deep international economic integration puts the nation-state in what Rodrik calls a golden straitjacket, which is inconsistent with democratic control. Rodrik makes this point out of concern for democracy, but here it is useful to frame it in a more general way: deep international economic integration is inconsistent with sub-global control, whether democratic or not: a fascist dictator or a traditional oligarchy could find itself uncomfortably constrained by the rules of the WTO, just as easily as a democratic polity. The alternatives, Rodrik points out, are deeper global governance (democratic and federal, in his account), or shallower international economic integration. Deeper global governance, however, is unlikely, for two reasons. Frst, there is the long and problematic process required to develop the legitimacy and institutions required for governance (especially democratic governance) at any level; seeking these on a global scale is a worthy project, but there is little reason to believe that anybody alive today will see it. Second, deeper institutions of global governance, especially if democratic, would vitiate one of the virtues global economic integration holds for its most fervent and powerful advocates, which is precisely that it does put a set of golden handcuffs on states. The minimalist institutions of the WTO, run from a small secretariat in Geneva, can be seen as aspiring to impose an economically liberal order of property and free contracts, à la Buchanan and Tullock (1962). For this constituency, deep and accountable institutions of global governance would offer no real advantages over national or regional governance.

Because deeper global governance is unlikely, those resisting golden handcuffs will find it necessary to focus on renewing institutions of economic regulation at a sub-global level. Given the scale properties of today’s production systems and the distance-shrinking technologies in use, it is likely that that level will be regional.

It is not necessary here to judge whether these national and regional political actors can produce any genuine public advantages, or will simply use sub-global regulation to protect rents for some small number of the powerful. Nor is it necessary to go into the long menu of regulation – from macroeconomic stabilization to various forms of social policy – that deeper institutional integration can offer; nor to consider the decision-making frameworks, democratic or otherwise, within which sub-global economic governance can be held accountable; nor the bases of identity and legitimacy attached to all of these institutions. What is important here is only that there are many who do value economic governance at some sub-global level, and so weigh the benefits of the global and the sub-global in some sort of balance. This chapter is about how that balance can shift.

The “First Globalization” of the Nineteenth Century, and the Emergence of National Economies

This is not a new story: the parallel processes of global and sub-global (national or regional) integration, with global integration racing ahead only to be contained by the slower but stronger force from below, is not a new one. It recapitulates a process that took place between the mid-nineteenth and early twentieth centuries. That earlier case also saw the rapid liberalization of international trade in Europe, in parallel with the growth and integration of national markets. In a few years following 1850, trade barriers between European countries were abruptly removed in a great wave of international trade liberalization. Then, from about 1879, the trade liberalization process reversed; tariff barriers were restored; following 1914, international capital flows were curtailed as well, by many measures, and it was not until 1980 that the world economy achieved its pre-1914 measures of integration.

The countries that closed their borders in the late nineteenth and early twentieth centuries were not at all the same as the countries that opened them in the 1850s and 1860s. The states now controlled larger territories, and consequently were fewer in number (empires grew; Germany and Italy were created out of numerous small states). The domestic markets controlled by the states had each become more closely integrated, both because of investment in infrastructure based on new technologies (railways, telegraph), and because of institutional change (the elimination of local monopoly privileges and internal trade barriers). The newly industrialized countries (NICs) – Germany, the United States, France, Japan, and so on – had greatly narrowed the gaps in technological capability and industrial output between themselves and Britain.

All of these factors – the growth of states, the improved integration of domestic markets, and industrial and technological catch-up – changed the relative pay-offs from international liberalization and national economic management.

Global Liberalization and Regional Integration Today

After Britain, of course, came America. From the late nineteenth century onward, the United States claimed ascendancy in new production methods, in science and technology, in military might, and in finance. Its dominance was settled by the defeat of Germany and Japan in the Second World War, and by the inability of the USSR to match the United States in innovation and growth. Under American dominance, international markets were gradually opened – first in trade in goods and in FDI.

US ascendancy seemed to falter in the 1970s, with a combination of military defeat in Vietnam, persistent Soviet influence, and the renewed commercial parity of Western Europe and Japan. But then, the USSR collapsed. Moreover, the USSR’s collapse was only the most extreme manifestation of a more general crisis in the mass production approach to industry, and the systems of regulation and governance that went with it (Guy 2009 : chs. 9–10). Flexible production methods, network products, and information products between them produced market structures that were incompatible with the systems of post-war regulation in much of the capitalist world (Aglietta 2001). The principal political response to this situation was neo-liberalism. In this setting, the United States was more dominant than ever, and with that dominance came the more rapid liberalization of international markets – broad international capital flows, trade in services, and more standardized and extensive intellectual property markets, all under the WTO framework in the 1990s. These changes in the institutional framework were accompanied by changes in the geography of economic activity: the new international division of labor (NIDL) in manufacturing, the burgeoning of cross-border production networks, and corporations claiming to be “global.”

The late twentieth-century liberalization was accompanied by the arrival of the first major new aspirants to the club of developed industrial nations since the modern system of national economies had consolidated in the late nineteenth century. Before that, in the first industrial revolution, Britain’s initial industrial growth had been so exceptional that it brought a “great divergence” in wealth, technology, and power between Britain and most of the world, including, most shockingly, China (Pomeranz 2000). The countries catching up with Britain in the nineteenth century were (with the exception of Japan) blessed to be either Britain’s neighbors in Europe, or its settler colonies. From the development of the system of national economies in the late nineteenth century until the 1990s, the world saw what Pritchett (1997) called “divergence, big time”: between those developed countries and the “developing” ones, the gaps in wealth and in technological capability grew and grew. The few late exceptions – the Tigers of East Asia who joined the ranks of the global middle class so rapidly between 1970 and 1990 – were anomalies that stood out so starkly in that divergent world that they became the subjects of endless study, and of largely fruitless emulation (Amsden, Kochanowicz, and Taylor 1994; Gereffi and Wyman 1990; Rodrik 2004; Wade 1990).

In the 1990s, suddenly, vast China was joining the ranks of the industrial and technologically sophisticated; most of Southeast Asia seemed to be following in its wake; across Latin America, South Asia, and, in the 2000s, Africa, numerous other countries followed. The relationship of these NICs to the old OECD countries is the same as that of Germany, the United States, France, and Japan to Britain in the 1870s. And, while the new wave of industrialization and development owes much to international liberalization (Williamson 1996), we should not let that debt blind us to two facts. One is that development – the reduction in the huge differentials of wealth, power, and in particular scientific and technological capability between the leading economies and the more successful “emerging” markets – will change the payoffs that different forms of international economic integration provide to different actors in both sets of countries; players who now find global liberalization beneficial may not continue to do so. The other is that at the same time global institutions of liberalization and apparently global production systems have been put in place, regional systems have developed: regional systems of production, markets for goods and services, transport networks, and institutions of governance. Such regional integration has not occurred to the same extent or in the same way everywhere, but it has been substantial. Two regions in particular, Europe and China (the latter being a nation-state which, for reasons that will become clear, I treat as a region), are well along in the process of recapitulating, on a larger scale, the creation of national economies in the late nineteenth century.

Regional Production

However much we talk of a globalized economy, the fact is that a disproportionate share of international economic integration has been regional. In the midst of the globalist euphoria of the 1990s, Mansfield and Milner (1999) noted that the growth of international trade between 1948 and 1990 had actually been higher at the intra-regional level than at the inter-regional. In aggregate, this was so whether the regions were defined politically (as regional trade blocs) or by the more basic geography of continents and sub-continents. In many regions, however, Mansfield and Milner found a decline in the relative share of regional trade in the 1980s. That could be interpreted in the conventional globalization lens: after 1980, real international production kicks into gear. Yet, if we update the numbers we see that intra-regional trade has, on the whole, continued to grow more quickly than inter-regional trade. Figure 28.1 takes as examples a number of trade blocs, large and small, on different continents. The data is the ratio between foreign trade within the bloc, and foreign trade between members of the bloc and the rest of the world, from 1954 to 2012. To avoid bias from the changing (usually, growing) membership of the blocs, countries are included if and only if they were members at the end of the data series – indeed, in the early years of the series, many of these blocs did not formally exist, in which case the bloc is just a set of independent countries or colonial territories from that time. The results vary considerably from year to year; events leave their mark: the debt crisis in Argentina in the late 1990s was a big setback for the Mercado Común del Sur (Mercosur), while the 15 southern and eastern African countries which are now the Southern African Development Community (SADC) did little trade with each other during the later years of apartheid and Portugal’s colonial wars; the overall trend, however, is upward, not only in huge blocs such at the EU and the Association of Southeast Asian Nations (ASEAN) – 10 countries with a combined population of over 600 million – but in small ones such as the Caribbean Community (Caricom) of 15 states, mostly small islands, with a combined population of less than 17 million.

That intra-regional trade should be growing faster than inter-regional trade is consistent with the fact that for many decades trade in intermediate goods (sometimes proxied by intra-industry trade) has grown faster than trade in raw materials or finished goods. It also fits with numerous other observations about supply chains and production networks. Statistics for China’s high-tech exports are closely mirrored by its high-tech imports, the latter being components for the former, and originating mostly within East Asia (Branstetter and Lardy 2008). Collinson and Rugman (2008) find that the foreign assets of Japanese MNCs are overwhelmingly within East Asia. “Global” auto companies such as Ford, General Motors, Volkswagen, and Nissan/Renault organize most of their manufacturing on a regional basis to serve regional markets: a European Ford is essentially made in Europe, a North American Ford in North America. International supply chains are sometimes very short indeed. Although some maquiladoras – factories in Mexico near the US border – are affiliated with Japanese or Korean companies (Shaiken 1994; Kenney and Florida 1994), they are more often associated with American ones. International integration can occur over distances as short as a bridge between El Paso and Ciudad Juarez, with different wage rates on the opposite banks of the Rio Grande – all governed by the North American Free Trade Agreement (NAFTA).

MNCs do aspire to sell their products globally, but even in sales they seldom overcome a significant home-region bias (Rugman and Verbeke 2004). What MNCs move inter-regionally is disproportionately either traditional trade (finished products and raw materials, rather than intermediate goods), or intangibles: technology, organizational know-how and operating templates, and brands.

MNCs also distribute their R&D activities across countries, or engage in joint R&D projects with corporations in other countries: call this “international R&D.” MNCs typically locate research facilities in places where they can pick up new knowledge from others in the area, often within existing clusters in foreign countries (Cantwell and Iammarino 2001, 2003).

Yet like international production, international R&D tends to be more regional than it is global. Much has been made of the localization of knowledge exchange, in localized clusters where concentrations of skilled workers and face-to-face contact can foster discovery. Such clusters have, of course, many links to people and companies in more distant places – the role of the MNC in connecting clusters, and mining them for knowledge, is well established (Saxenian and Sabel 2008; Iammarino and McCann 2013). Yet, even when corporate organization has liberated knowledge exchange from the bounds of the local travel-to-work area, distance continues to matter. Studying Silicon Valley companies’ research collaborations with firms outside of the Silicon Valley cluster, Arita and McCann (2000) find them disproportionately within a radius that allows return air travel, and time for meetings, within a single day. This keeps the lion’s share of such collaborations in western North America.

The regional organization of both production and research within MNCs is reflected in the growing decentralization of control (Iammarino and McCann, this volume, Chapter 14). As modern corporations are essentially portfolios of operational and intellectual assets, decentralization of control presents a situation in which a global corporation could be easily disassembled into a number of regional ones, should that prove the more profitable course.

Regional Economic Integration: Europe, China, and Others

Will It Be Different This Time?

Are we, then, on the way to seeing regional blocs take the place of nation-states as the basic sub-global economic units? Or are there features of today’s world that make this outcome unlikely? Let us consider three factors: differences between our “knowledge economy” and the manufacturing economy of the nineteenth century; the political power of MNCs; and the global environmental crisis.

It may be that the knowledge economy of today is less conducive to the creation of closed national or regional units than was the manufacturing economy of the late nineteenth and early twentieth centuries. There are two reasons this might be so. One is that information- based products and processes often exhibit unlimited increasing returns. To take an extreme case: all of the costs of making Microsoft Windows are sunk, marginal costs of production are zero, so the natural market would seem to be global; the same could be said of genetically modified seeds and any digitized information. These are extreme, if important cases, but their greater importance lies in illustrating a more general fact: most of the goods and services we use have a much greater share of code – sets of instructions that can be replicated at zero marginal cost – in their makeup than they used to.

The second reason is that the complexity of knowledge used in production, and the speed with which that knowledge changes, may mean that the global circulation of that knowledge requires the visible hand capabilities, the dynamic competencies, of big corporations: that is, the argument goes, the problems of knowledge management and technology integration have become too complex to be left to the unregulated market or the free exchange of knowledge; in the international sphere that puts the MNC, with its internalization advantages, front and centre. It may be ironic that one of the key arguments for a regime of global liberalism is rooted in the inability of markets to match the performance of corporate bureaucracies, but irony alone does not invalidate an argument.

The apparent scale economies associated with information products, however, are legal constructs, not physical properties of the production process. Certain countries – notably the United States, United Kingdom, France, and Sweden – have become major net exporters of information products and other intellectual property, and have come to rely on them for foreign exchange; moreover, many of the world’s great fortunes are built on intellectual property monopolies, and those holding these fortunes fight to keep them. Consequently, the enforcement and extension of these rights has become a priority in the trade policies of information product exporters. The volumes of trade involved are large, and if we take enforcement of the rights as given the natural markets are indeed global. Yet this is a precarious foundation for any form of global integration. The legal rights which underlie the appropriation of rents from information products are contested, through legal and political processes, through the development of open source alternatives, through simple violation of the rights, and through engineering around the protected properties. It is not to be taken for granted that the actors who are on the deficit end of transactions in intellectual property – actors who constitute most of the world’s countries, most of the world’s population, and most of the world’s industries – will tolerate the current intellectual property regime indefinitely (Guy 2007).

The apparent superiority of MNCs in producing, transferring, and applying new technical knowledge is, like infinite economies of scale in software, an illusion borne of naïve extrapolation of recent trends. The role MNCs play in transferring knowledge today is analogous to the role played by machinery exports from Britain in the mid-nineteenth century: alternatives are quickly catching up. As the new industrial countries improve their absorptive capacity, they will be able to rely more on copying (even now, not a rarity) and on licensing (Athreye and Kapur, this volume, Chapter 9), rather than inviting global MNCs in. As a result, the overseas presence of corporations will shrink, along with FDI.

MNCs now wield considerable political power – again, a difference from the situation in 1880, when MNCs scarcely existed. Where does the power come from? Like the Pope in Stalin’s famous question, MNCs have no armored divisions. Strange (1992) explained their power as a consequence of their technological capabilities together with their ability to provide access to consumer and capital markets in rich countries: with these levers, they could demand from poor countries the liberalization of international trade and investment. These levers will lose their force as regional markets are consolidated and the absorptive capacity of the new industrial countries improves.

The era of national economic management ran for 100 years, from 1880 to 1980. It brought with it some exceedingly ugly and tragic times, but its last three decades were ones of unprecedented peace, prosperity, and equality within the developed world – what has been called the Golden Age of Capitalism (Marglin and Schor 1990). The neoliberal program, of which global economic integration must be reckoned a part, has served to prevent any return to the relatively egalitarian policies of the Golden Age. While regional integration has often been part of this neo-liberal agenda (NAFTA being a case in point), robust and democratically accountable regional institutions would be anathema to it. The development of such regional institutions could form part of a society’s latest defense against the destabilizing depredations of the market (Polanyi 1957). Or not – perhaps we’re simply at the end of democracy and dreams of a fair society (Crouch 2004).

Finally, decisions about international economic integration are taking place in a world threatened by climate change – an irreducibly global problem. They involve extremely difficult global collective action problems, and it seems unlikely these can be solved without substantial strengthening of global governance (Gardiner 2011). Within such a framework, would more extensive global economic integration not be likely?

To answer this we must return to the taxonomy of types of integration with which this chapter began, and ask how an effective system of global environmental governance would affect them. Any such system would bring with it some comprehensive scheme for reducing release of carbon into the atmosphere, probably through pricing. This would have a pronounced effect on the cost of high-speed air and sea transport – the two major carbon sources for which feasible low-carbon close substitutes are not available. It is increases in speed, rather than reductions in transportation cost, which have facilitated far-flung production networks (Hummels 2006). Sea and air transport can be decarbonized using existing technologies, but only at a great sacrifice of speed – sail-assisted freighters, and dirigibles. The weight of increased air and sea transport costs (or reduced speed) would fall on long-distance supply chains; and on various forms of short-term migration, including those which hold together far-flung corporate operations, tourism, and, it must be said, academic conferences.

Moreover, at present the new international division of labor receives a substantial subsidy from the fact that environmental regulations, including the carbon credit market under the Kyoto protocol, are not global. Factories have shifted to countries in which carbon pollution and other forms of air pollution are lightly regulated; the goods are then exported to countries with tighter controls on emissions (Davis and Caldeira 2010; Caldeira and Davis 2011). Global internalization of carbon costs would end this subsidy to offshoring. Without effective global environmental regulation, of course, global supply chains and profligate use of air travel might continue unabated. Such a world is probably not one in which we want our grandchildren to live.

If we combine technological catch-up by new industrial countries, the gradual rescaling of deep economic governance from the national to the regional level, and the civilizational imperative to restrict carbon emissions, we are likely to see global economic integration becoming shallower. We will see thriving global markets in intellectual property (licensing, in place of the direct operation of MNCs); global technical standards (which, again, substitute for the operation of MNCs by allowing production of interchangeable components by various producers); continued global use and development of open source software, with local customization; global environmental standards and carbon taxation guidelines; global trade deals and efforts to maintain a stable system of currencies and credit. Sub-global governments – nation-states, regional blocs – will likely reassert control over capital flows, and end the rush to protect foreign investment through an extra-territorial legal system.

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