How Regionalization Can Be as Profitable as Globalization

Global GDP, Population Make Economies of Scale Possible in Smaller Geographic Footprints

Do you really need to tap global markets to achieve economies of scale? And will the future world economy even allow for such?

After all, former CIA Director and U.S. Secretary of Defense Robert Gates says the political environment that favors freedom of the seas, free trade and economic cooperation is under attack and disappearing.

Over the last few decades, international expansion was often a key for companies to achieve scale and competitive advantage. But back in 1980, global GDP was around $38 trillion. Global population was only 4.4 billion.

However, we now have 8 billion people in the world and a global GDP of $105 trillion. That leaves a lot of opportunity to target specific hemispheres, regions and even countries. And conducting business over smaller geographic footprints reduces transportation costs, decreases lead time and enhances supply chain resilience.

Let’s examine the dynamic, volatile political landscape and how your business can capitalize on increased trade going forward.

Gates: Missiles and Tariffs Batter Markets, Supply Chain Resiliency

Gates made his comments about the retreat of free trade at TPM24. The Journal of Commerce organized the global ocean container conference.

The bestselling author noted the following:

The hot war in Europe between Russia and Ukraine has killed hundreds of thousands of people, disrupting trade and shipping.
The Middle East is suffering four simultaneous conflicts: The Houthis attacking shipping in the Red Sea, Israel-Gaza, Israel-Hezbollah and militia wars in Iraq and Syria. These conflicts also are disrupting shipping.
China is becoming increasingly belligerent with its territorial demands. The country claims Taiwan and most of the South China Sea – key shipping lanes.
North Korea is more aggressive and is getting technical assistance for its ballistic missile and other military programs from Russia.
More countries, including the U.S., will be enacting tariffs and other protectionist policies.

“I think companies need to have contingency plans,” Gates told the crowd at TPM24. “I think they also need to be looking at how you diversify … If you’re sourcing out of one country that may be hostile, can you move some of those capabilities somewhere else? Can you look at regionalization instead of putting everything in one country anywhere? Is it economically feasible to diversify?”

Without using the word, Gates is touting optionality for supply chain resiliency and economic growth. What I’ve been recommending for the last three years. See here and here and here.

Borders and Bridges for Deglobalization and Globalization

Supply chains that seek alternatives from global hot spots don’t just come home. They look for production, manufacturing and transportation sources elsewhere.

After all, even the U.S., the world’s largest economy, can’t produce everything it needs. What chance does landlocked Switzerland have?

This is what I call simultaneous deglobalization and globalization. Globalization refers to the interdependence of economies, cultures and populations. Deglobalization is the movement toward a less-integrated world, characterized by local solutions, onshoring, tariffs and border control.

The shift away from some regions (deglobalization) opens opportunities for nearshoring, reshoring and moving production to friendly countries, integrating supply chains with other regions (globalization).

As supply chain leaders redesign supply chains, nearshoring and friendshoring options require the same deep integration into chosen regions or nations that full-scale globalization requires. Hence the simultaneous phenomenon of globalization and deglobalization, which will continue to evolve.

Companies that find true optionality will win. That is the only you way can deliver goods and services during the current or next round of supply chain disruptions.

Need Economies of Scale? Regional Alliances to the Rescue

We will never have a global system where every country produces everything its population needs. (If global trade falls that far, populations are going to be in a lot of need.)

But I can see more trade-based alliances based on regions, hemispheres and the political reliability of countries.

Luckily, the stratospheric growth of global GDP makes that strategy possible. And yes, regions and hemispheres are large enough to allow for economies of scale.

Just look at North America:

United States GDP: $27.36 trillion
Canada GDP: $1.9 trillion
Mexico GDP: $2.67 trillion

The U.S. is the world’s largest economy. Coupled with its North American neighbors, and you’re looking at a $31.93 trillion economy. All tightly bound by The United States-Mexico-Canada Agreement (USMCA), which replaced NAFTA in 2020.

Want to stay with the Americas?

Combined, all Latin America and the Caribbean have GDPs totaling $6.5 trillion. That includes Mexico. So, you’re looking at a $35.76 trillion economy.

Yes, many of those are developing countries. But economic activity is increasing across the region. Their geographic nearness reduces supply chain risks. And China was not a world powerhouse when it opened to global trade in the 1980s.

Want to add friendly countries and traditional allies? Overall European Union GDP is north of $16 trillion and growing. The United Kingdom’s GDP stands at $3.3 trillion.

Now we’re looking at a $55 trillion-plus GDP. Well above 1980’s global GDP of $38 trillion. And parts of western Africa are in the Western Hemisphere, too.

New Trade Routes Require a New Supply Chain Hub

Of course, new trade routes create new difficulties, which need new solutions.

The Western Hemisphere, particularly North America, grapples with significant constraints in port capacity and efficiency. As supply chains continually shift, this issue becomes more pronounced.

Ports play a pivotal role in handling most of the trade flow. However, the busiest ports in the United States – Los Angeles and Long Beach – suffer from abysmal inefficiency. Meanwhile, smaller East and Gulf Coast ports face challenges due to limited land availability for expansion and a shortage of labor to support infrastructure growth.

But the solution lies approximately 800 miles southeast of Miami: The Dominican Republic. This Caribbean nation possesses the three critical “Ls”: location, land and labor. With these foundational elements, it is poised to become THE supply chain hub in the Western Hemisphere.

What’s missing? The fourth “L”: logistics infrastructure. Once this is in place, the Dominican Republic can transform into a modern-day lighthouse for global trade. Here’s how:

Port upgrades: Investing in port facilities and modernizing existing infrastructure will enhance efficiency and capacity.
Roads and railroads: Developing robust transportation networks connecting ports to industrial zones and markets is essential.
Warehousing: Expanding storage facilities ensures seamless movement of goods.
Logistics technology: The Dominican Republic can leverage artificial intelligence, machine learning and cloud computing to optimize supply chain processes. Much of this progress can be adopted from standardized software solutions.

In this transformative journey, the Dominican Republic could follow the path of Singapore, which experienced a remarkable 100-fold increase in GDP per capita from 1965 to 2022.

Selective Globalization Helps You Thrive in a Complex Trade Landscape

The changes are coming. The disruptions will continue.

Yes, it certainly is preferable to sell everywhere and anywhere. But escalating global instability and conflicts make that future less possible. It will be more difficult to find the right dance partners for international trade.

Global trade will continue, but supply chains and markets you previously had access to will shift. Some will become off-limits.

North America will still trade with Asia, Europe, Africa, the Middle East, etc. So will Europe.

Outside of a few drastic scenarios, China will still remain a large part of global trade. Those possibilities? A Chinese blockade or invasion of Taiwan or shooting between China, the Philippines and other nations contesting the South China Sea.

But thanks to growing populations and growing global GDP, you can have robust growth, economies of scale and strong markets – without having to sell to all 195 countries on the Earth.

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