National borders: the last bastions against globalisation

In the supermarkets at least, it seems that borders no longer exist. Whether they come from Australia or the Mediterranean region, kiwis still cost the same and have the same kind of skin. For the consumer, there can be no doubt that globalisation has led to the disappearance of national borders. This is an idea supported by the majority but contradicted by the models of the economist Thierry Mayer.

China and Europe are not at war and will never be at war,” said EU Trade Commissioner Peter Mandelson in an attempt to ease the tensions that have been growing since agreements on textiles were scrapped at the beginning of the year. These agreements, which were signed in 1975, offered a protection system against Chinese textile imports and expired on 1 January 2005. Since then, socks, tights and t-shirts made in China have surged onto the European market, increasing the total imports from China by a massive 50% and multiplying them by four of five for some products!

Many people believe that this phenomenon confirms that we are heading towards a more and more open market, in which trade barriers are collapsing. They believe this is an inevitable effect of globalisation, which economists like Thierry Mayer, scientific adviser to the French research centre in international economics CEPII (Centre d’études prospectives et d’informations internationales), define as “the possibility of obtaining goods, technologies or capital just as easily from one end of the earth to the other”. The progressive disappearance of trade barriers would enable this to happen. There are two opposing groups in the face of this development: those who believe the scenario to be a catastrophe and those who believe it to be ideal.

Putting this controversy aside, some economists deal with the subject more methodically by studying mathematical calculations. Recent studies show that, in spite of the opening up of markets, national borders still affect international trade, and more than just a little. According to Thierry Mayer, trade between two areas is divided on average by 80 if they are separated by a border! Understanding the complex origin of the significance of borders is at the heart of this specialist’s research. He suggests there are political or economic barriers (the maintenance of customs duties, the volatility of exchange rates etc.) as well as restrictions imposed by cultural customs. He believes that globalisation is a lot less powerful these days than we might think.

01.From trade to globalisation

The link between trade and faraway places goes back as far as ancient Greek mythology. Hermes was God of Merchants and Commerce as well as Travel. Since the dawn of time in fact, commerce has been building bridges between the various parts of the globe. But it was the technical advances of the 19th century - such as series production, new means of transport, information and communication technology - that led to the explosion in trading opportunities. It was in the 19th century that we developed the necessary tools to expand markets on a global scale.

But favourable political and economic conditions were still lacking and did not appear until the 1970s onwards. This is when the trade barriers that had been introduced during the two world wars and the crisis of the 1930s first started to break down. During the final years of the 20th century, numerous partnerships aimed at boosting trade between groups of countries were set up, including the creation of the single market in the European Union in 1993, and the signature of the North American Free Trade Agreement (NAFTA) between Canada, the United States (1988) and more recently Mexico (1992). International organisations such as the WTO (which replaced the GATT set up in 1947) were created to manage the opening up of markets. Since it was formed in 1995, the WTO has supervised many negotiations covering the trade of goods and services. Six years after it came into being, customs duty, quotas and other trade restrictions had been cut by an average of 40%. In 50 years, global trade has increased sevenfold. The era of globalisation is underway.

In this context, how can we not envisage national borders being abolished from an economic point of view? There is only one more step to take before we can consider, as the journalist Laurence Benhamou put it in her recent book “Le grand bazar mondial” (“The great global marketplace”) that “our sheets come from Nepal, our Brussels sprouts from Guatemala, our glasses and our lipstick from China”. It seems almost out of place to think of the situation in any other way. And yet some economic research reasserts the impact of borders and brings into question the extent of the globalisation phenomenon.

02.A surprising model

For the past ten years or so, running contrary to a great many preconceived ideas, specialist literature on the economy has agreed on one fact. That in spite of the liberalisation of markets, political borders are still restricting trade. It all began in 1995 at a time when globalisation was in full swing. A Canadian economist called John McCallum published an article, which really went against the grain. He based his argument on a mathematical equation known as a gravity model to prove that, based on a comparable geographical distance and economic size, a Canadian province traded 20 times more with another Canadian province than with a US state. His work reveals that there is therefore restricted trade between two regions as soon as they are separated by a border. This phenomenon, labelled the “border effect”, really stunned the specialists. How could the existence of such an effect between two regions as culturally and economically close as Canada and the United States be explained?

Once refined, revised and applied to other economic areas, the gravity model systematically draws the same conclusions. “Even if we take all the problems of a technical or mathematical nature into account, there is still an immense and surprising border effect”, says Thierry Mayer, Professor of Economics at Paris-Sud University and scientific adviser to the CEPII. Within the United States, for example, the volume of trade is 80 times higher than trade between the United States and Europe. “The existence of a border effect is true for international trade flows in general, even within zones where there are only very weak restrictions on trading, such as in the European Union”, the specialist points out. As an example, trading goods between Paris and Strasbourg is ten times easier than between Paris and Amsterdam, which is practically the same distance from the French capital (305 miles compared with 314). This is all the more surprising since the two countries belong to a single market that is supposed to offer the consumer the possibility of accessing domestic and European goods just as easily. And when it comes to trading with a country in North Africa, for example, “even when it’s the same distance, trading is three hundred times or even a thousand times more difficult!” according to Thierry Mayer.

Following in the footsteps of his fellow economists, Thierry Mayer is trying to get to the bottom of this mystery, which is considered to be one of the great enigmas of international macroeconomics. His analyses have pointed to a variability of the impact of borders depending on the business sectors concerned. In chemicals, transport equipment and precision instruments, borders have a minor impact. On the other hand, furniture, wood and foodstuffs are less easy to transport from one country to another. Remember the case of French Roquefort in 1999. Its export to the United States decreased dramatically following a new American tax on some cheeses, which reinforced the border effect.

03.Why some borders endure

Without making a random list, Thierry Mayer tried to consider all the structures that introduce a border effect. Tax, customs duties and quotas that limit quantities are the most obvious examples of these. They provide a direct and obvious explanation for the border effect. The case of “dollar bananas” from Latin America provides a good example: a surcharge is imposed on dollar bananas in the European market compared with bananas produced by the ACP (African, Caribbean and Pacific) countries. They are therefore less likely to penetrate the borders of the European market.

On a more global level, Joseph E. Stiglitz, Nobel prize winner for economics and former Vice President of the World Bank, writes in his scathing book “Globalization and its discontents”, “The West arranged for globalisation to take place in such a way that it received a disproportionate share of its rewards at the expense of the developing world […] because advanced industrial countries did not want to open their markets to the poor countries – for example by maintaining their quotas on a great many products from textiles to sugar […]”. These protection systems are now crumbling thanks to the negotiations of the WTO, but this is a gradual process and for the time being is happening “in a less widespread way than we might think”, according to Thierry Mayer. In other words, the recent opening of borders to Chinese textiles is an exception. In any case, China worked relentlessly to obtain the lifting of quotas. A myriad of goods are still in the grip of protectionist measures.

Let’s imagine that this first set of barriers had been overcome. States have other solutions they can use to control incoming products from abroad. These include establishing specific health and safety standards, technical standards or complex and expensive administrative formalities for imported products. For example, an environmental standard introduced in France recently forced the Casino group to stop using the Chinese plastic bags it was importing and handing out at the cash desk.

Another obstacle to international trade is the volatility of exchange rates. In fact, the depreciation of a country’s currency allows it to increase its exports, whilst if a currency becomes stronger exports are restricted. This is the case at present for the European currency as the euro is worth USD 1.17. As a result, products exported from Europe become less and less affordable for other countries. According to the French finance ministry, the strong appreciation of the euro is partly responsible for the bad performance of French foreign trade for which the deficit was EUR 15 billion for the first eight months of 2005.

Finally, the political regime also has a part to play. A dictatorial regime, or one that is unstable or has various different politics, does not favour a common engagement. Cuba, for example, has been put on the sidelines and this affects its trade. Under Hugo Chavez, Venezuela decided to supply Cuba with oil at a preferential rate. In response, the United States limited its trade with Venezuela to a minimum…. then a political gulf developed and economic barriers were set up. On the other hand, transport seems to have less influence than we would have thought; “It is not very likely that any differences and changes in the type of transport used would have a significant impact on the assessment of border effects”, Thierry Mayer continues in his study entitled “Effet frontière, intégration économique et 'forteresse europe'” (“Border effect, economic integration and the ‘European fortress’”) published in the “Economie et prevision” journal in France.

04.When the consumer determines the market and its borders

There is still one essential piece in the jigsaw puzzle of explanations for the border effect, and that is the consumer. The consumer is the active link in the chain of this mechanism, in more ways than one. Firstly, consumers are citizens who tend to move around and migrate from one nation to another. In fact, the setting up of foreign communities encourages trade in products coming from the countries they originate from. The major cities of rich countries all have an African, Arabic, Hispanic, Indian or Italian district, at the heart of which a community business has been set up. Outside these large cities, which migrants already have a great deal of difficulty in reaching, there is nothing. Many experts share the opinion of Pierre-Noël Giraud, who set up the Centre of research into the industrial economy (CERNA) at the Ecole Nationale Supérieure des Mines in Paris: “We are not part of a “global economy” because borders continue to exist for human traffic, and so we are still not able to travel freely.” Even more disturbing is the fact that even within an entity such as Europe, where national borders are open, less than 1% of the population lives outside their country of origin! The reasons for this include cultural differences and language barriers, to name but a few.

Going beyond the migratory phenomenon, consumers also plays a part in limiting trade flows because of their attitudes and preferences. Traditions, cultures, ways of life and language means that a Briton’s shopping trolley will be completely different to that of a French person. This is why you don’t find snails from Burgundy in England, or jelly in France or camembert in the United States. Multinationals are beginning to understand this and are adapting their products to consumer tastes. Coca-Cola, the third largest producer of bottled water, has adapted its Dasani brand with different products for each country: treated tap water in Great Britain, sparkling water in Germany and spring water in France. This is because in France, people generally associate “spring water” with purity. And just by going into a supermarket in Germany, you will soon see that German sparkling water has not crossed the Maginot Line… it is just what their palate dictates. Eventually, these preferences could transform into definite obstacles. For example, France’s rejection of GM products and hormone-treated beef led to regulations being passed. On the other side of the Atlantic, it is non-pasteurised foods that are now subject to regulations.

Contrary to what we might think, consumers do not always go for the cheapest products. This means they don’t always choose to buy cheap imports. A recent survey carried out by TNS-Sofres concluded that a high price, provided that it is perceived to be justified, does not always put the consumer off. In France, “Hard discount” sometimes makes way for the “produits du terroir” (regional specialities), “Label Rouge” (guaranteeing quality and provenance) and “made in France”. This explains how, whilst the European textile industry is plunged into crisis and forced (like “Kindy”) to relocate to Asia or Romania, “Tricotage des Vosges” (Dim, Sara Lee etc.) is maintaining its turnover thanks to its socks, which are 100% made in France. This guarantees superior quality, according to the company’s CEO, which explains why customers continue to buy Dim socks even though the cost of a pair is 10 to 20% higher than Kindy socks which are imported. Setting aside this fragmented market, the same effect is well known in the motor industry. You rarely see a Renault on Japanese roads, and the same goes for a Lada in France…. As the saying goes “there’s no accounting for taste” and this is precisely what all the studies into international trade confirm - for now at least.

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