World Economy

Reassessing the Risk Factor

Reassessing the Risk FactorReassessing the Risk Factor

For the past three decades, regional trade agreements (RTAs) have had quite a growth spurt. As of January, the World Trade Organization (WTO) had received 446 notifications of RTAs regarding goods and services, 259 of which are currently in effect. The growth of RTAs is part of the reason why the whole notion of globalization is being widely reconsidered — but their impact on businesses will likely be mixed.

“The whole concept of a globalized world is being reassessed from a risk perspective,” says Carol Fox, Director, Strategic and Enterprise Risk Practice, Risk and Insurance Management Society (RIMS), Bloomberg reported.

Despite impressive growth numbers, RTAs are not universally embraced. According to the Organization for Economic Cooperation and Development (OECD), regionalism in trade leads to a patchwork effect between members and non-members within the region concerned, and can raise transaction costs as a result. There is also a point of view that RTAs undercut Bretton Woods-inspired open markets and world financial order.

Adoption of RTAs

From the WTO’s perspective, the adoption of RTAs requires careful consideration, at the very least. “In some cases [RTA] negotiations are between parties that account for very substantial shares of world trade and GDP,” says WTO Director-General Roberto Carvalho de Azevedo.

“And often these initiatives exclude the smallest and most vulnerable countries, and do not fully address the gains from trade that can be obtained through global value chains. Therefore, while we welcome RTAs, we cannot ignore their obvious limitations or the need to avoid harmful effects to third parties.”

Reality of RTAs

The growth of RTAs is, of course, driven by the belief that they will stimulate development and growth among the participating countries. With access to larger markets, for example, the volume of production can be stepped up, reducing costs and improving the international competitiveness of member countries over non-members.

And, in theory, when countries are linked by RTAs, it becomes easier to pursue joint projects affecting several nations (think infrastructure), which can boost economic development.

RTAs, however, don’t exist in a vacuum, and the signing of an agreement doesn’t create the instant harmony that a region needs to act as a single entity.

“In many of the places where RTAs exist, there is a history of complex underlying tensions,” says Diederik van Wassenaer, Global Head of Network, ING Commercial Banking. “Differences in beliefs, tensions over debt, political disagreements—these tensions can undermine the effectiveness of any agreement, so they benefit some countries more than others.”

To van Wassenaer, trade is a reflection of the rapidly evolving world we live in, and trade agreements and governments are hard-pressed to maintain pace.

Whatever potential impact RTAs have on redefining or moving away from globalization toward “hubonomics,” van Wassenaer sees the growth of city-states as having tremendous potential to break down trade barriers, because they are where the value chain is enriched. “The economics that emerge from huge city-states and grow outward have a dynamic of their own,” he says.

Hubonomics World?

Companies seeking to take advantage of the emergence of such vibrant cities can consider a hub-based strategy that provides a variety of shared resources and services to local operations.

So, for example, while it might be difficult to justify the expense of certain widgets needed by one hub, an interconnected network of hubs sharing resources and knowledge can create efficiencies and economies of scale.

Many businesses that are considered successful global enterprises adopted a hub approach to business long ago because they realized that geographic and other distinctions were not erased by the rise of globalization. If anything, regionally focused strategies, in unison with local and global networks, can significantly boost a company’s performance.