Prepare for Regional Trading Blocs

Almost all of the economic news suffers an acute case of myopia, rarely looking beyond the short-term horizon. This myopia affects our views of the international economy: Will the value of the dollar go up or down in June, we ask, or will the trade balance improve next quarter?

But it sometimes makes sense to step back from the vagaries of the short-term economy and look for longer-term patterns that may provide clues about the coming decades. This column pursues that exercise for foreign trade. And the exercise leads me to speculate about the growing likelihood of trade rivalries and regional trading blocs within the global economy over the next 30 years.

We can begin by looking at the ebb and flow of international trade since roughly 1800. There are three striking regularities in those movements:

There have been four alternating periods of global expansion and contraction during the past two centuries.

The first, triggered by the Industrial Revolution in England, covered the period from the 1790s to the 1840s.

The second, when other countries such as the United States and Germany experienced their own “takeoffs” but Britannia still ruled the trading seas, extended from the 1840s through the 1890s.

Next came a period of intense international rivalry among the major capitalist economies--England, Germany, France, and the United States--that shaped the patterns of international trade from the 1890s through World War I and its collapse from World War I through the Depression of the 1930s.

Finally, in the period after World War II, we have witnessed a major boom in the global economy, under the umbrella of U.S. economic hegemony, through the mid-1960s or early 1970s and the spreading stagnation and instability of international trade from the early 1970s through the present.

In each of these four periods of alternating expansion and stagnation in the global economy, international trade has itself followed the broader pattern of boom and contraction. In each “long swing,” as these spans of roughly 50 years are sometimes called, international trade grew considerably more rapidly during the boom phase than the contraction phase.

The final “regularity” is the most interesting for the purposes of this exercise. These four episodes in the ebb and flow of international trade evidently fall into two groups. One group, covering the 1790s-1840s and the 1890s-1930s, witnessed relatively tepid expansion of international trade during the “boom” years. The other group, including the 1840s-1890s and the most recent period since World War II, experienced dramatically more rapid expansion of global trade during the boom years.

On average, more specifically, international trade expanded almost three times more rapidly during the boom years of the more buoyant pair than during the prosperity phase of the more lumpish pair--at an average annual growth rate of nearly 12% a year, compared to 4% a year.

Why this big difference between the two pairs?

Most economic historians who have looked at these patterns agree that the more buoyant pair had one principal feature in common: The global economy was dominated during their expansion phases by a single looming economic power. In the 1850s, Britain by itself accounted for roughly two-fifths of total world industrial production. In the late 1940s, similarly, the United States produced nearly half of all world industrial output.

This kind of hegemonic economic power provided the basis for stability within the global economy--for at least two important reasons. First and crucially, the dominant economy’s influence was so great that its national currency became the bedrock of international exchange, with currencies tied to the British pound in the 1850s-1870s and to the U.S. dollar from World War II through the 1960s. Second, their dominance ensured that other ambitious economic powers could not yet effectively challenge for access to attractive global markets, creating moments of relatively stable national shares of international trade and muted economic rivalry.

During each of the other pairs, by contrast, the lack of a single dominant economic power created much greater international uncertainty about exchange rate stability, trade shares and trading prospects. For protection, economic powers sought insulation from this intense economic rivalry through forming trading partnerships or, more aggressively, through colonization.

Do these patterns tell us anything meaningful about the present and future? I think so.

First, the period of U.S. global dominance has clearly come to an end. The United States will certainly remain one of the leading international economic powers for the foreseeable future, but it will never again account for nearly half of total global industrial production.

Second, and partly as a consequence, we are experiencing a turbulent process of restructuring of the global economy. The sudden international indebtedness of the United States, the growing power of Japan, the impending economic unification of Europe, the rise of “newly industrializing” economies such as those of Hong Kong and Taiwan--all reflect this process of restructuring.

Third, it nonetheless seems unlikely that any single economy can achieve the kind of international economic dominance that Britain and the United States once enjoyed. For all of the growing financial power of Japan, it seems unimaginable that it will rule the waves with anything like the power that Britain and the United States were able to achieve; there are now simply too many centers of mature economic power, with more or less equivalent resources and productive potential, for that kind of hegemony to be replicated.

Fourth, it therefore seems unlikely that a single national currency will become the bedrock of the international currency system in the way that the pound sterling and the U.S. dollar served as currency standards during the pair of buoyant global expansions. And yet, we seem decades away from either a return to the gold standard or international agreement among the major powers on some new, internationally guaranteed paper equivalent to the gold standard underwritten by an international agency such as the International Monetary Fund.

With these speculative projections, the regularities of the past two centuries would lead us to two final projections for the next 20 to 30 years:

Even if we return to relatively more stable, generalized economic growth around the globe, international trade is likely to expand much less rapidly than it did during the 1950s and 1960s--because the international economic environment will be much less stable and reliable than it was during the years of Pax Americana.

Further, as a way of enhancing their own power and seeking some protection from the turbulent economic winds, leading economic powers will be likely to concentrate on consolidating their own trading blocs. Europe is unifying itself, and intra-European trade is likely to expand especially rapidly after 1992. Japan appears to be moving toward a consolidation of its privileged and fruitful trading ties within the Pacific Rim. This would leave the United States, most likely, to intensify its trading relationships within North America (Canada and Mexico) and to seek the basis for stable and expanding trade with Latin America.

Are these trends “inevitable?” Certainly not. But the historical patterns have been sufficiently regular that they should provide us with food for thought. As Paul Kennedy has written in his recent best seller, “the history of the rise and fall of the Great Powers has in no way come to a full stop.”