After Hegemony V: Getting Connected

The global transition is about network re-wiring. Many people believe the world economy is fragmenting. It’s (probably) not. It’s fractionalizing. The distinction is important: if it was fragmenting, then it would be separating into isolated, disconnected, chunks; if it is fractionalizing, then it remains connected but no longer in a hub-and-spoke system with very high centrality for 1-2 core economies.

In other words, if it’s fragmenting then it’s falling apart, connectivity is going down. If it’s fractionalizing, then it’s being subdivided, connectivity is being re-distributed.

We’re moving from a world in which the periphery is primarily connected to each other indirectly, routed through a core economy — predominately the US — to a world in which more and more of the periphery is connected to each other directly or at least via alternative routes that connect clusters, or neighborhoods. Communities. If those communities are only connected via the US, the US has leverage; if they are connected directly the US has less influence.

Having options is good. Dependency is bad. Think of this as building multiple routes from one neighborhood to another. It can be inefficient, but if the road you usually take is constantly being raided by bandits who operate with impunity, then it’s worth finding an alternative.

So that’s what countries are doing. Some examples just from today’s SCMP. First, China continues expanding its neighborhood:

Investments under China’s Belt and Road Initiative surged in the first half of the year – particularly for projects in Central Asia related to metals and mining – leading some analysts to conclude Beijing is seeking access to critical natural resources as a precaution against escalatory trade restrictions from the United States.

The 150 countries taking part in the global infrastructure initiative received a combined US$124 billion in investments and construction contracts from January to June, more than the US$122 billion reported for all of 2024, the US-based China-Global South Project research organisation said on its website Tuesday.

Second, India shops for a new neighborhood to buy into, or maybe a bridging position that links several other neighborhoods (emphasis added):

US President Donald Trump’s harsh move against Indian imports saw the Asian giant launch an urgent diplomatic push to route trade around the US – including with Brazil, China, Russia, Britain, Japan, Australia and the EU.

Indian officials are expected to host a series of meetings with industry leaders and global trade counterparts in coming days, aiming to mitigate the impact of the new US tariffs, which threaten up to US$48 billion in exports to the US.

These countries will work out short-term “deals” with the US, of course. This will buy them time to make adjustments. They will build capacity that improves their bargaining position for the next round. Or maybe they’ll just skip the next round.

That’s not all, of course. Mercosur completed a trade deal with the EFTA last month. Surely it’s a coincidence that it’s being finished after 10 years, right now?

Mercosur and the European Free Trade Association (EFTA), comprised of Norway, Iceland, Switzerland and Liechtenstein, will benefit "from improved market access for more than 97% of their exports," they said in a joint statement.

The deal, which still requires parliamentary approval and a legal review from members of both blocs, will create a free-trade area with almost 300 million people and a combined GDP of more than $4.3 trillion, the groups said.

Exploratory talks between EFTA and Mercosur, which includes Brazil, Argentina, Uruguay and Paraguay while Bolivia is in the process of becoming a full member, kicked off in 2015.

The previously-negotiated Mercosur deal with the EU involves more constituent parties on the path to ratification — it took 20 years to negotiate (another coincidence!) — but chances seem high for resolution in the 2nd half of this year, when Brazil takes the Mercosur chair (depending on how France resolves its domestic political question). If it is completed it will transform the Americas (emphasis added again, focus on the word “weave”):

If the EU-Mercosur agreement is ratified, the EU will have FTAs with 95 percent of Latin America's GDP, compared to just 44 percent for the US and 14 percent for China.

Yet those numbers tell only part of the story.

The EU-Mercosur agreement can be the foundation for something far more ambitious: an interconnected web of trade agreements that bind together the existing FTAs — from north to south of the region — between the EU and Mexico, Central America, the Caribbean, Colombia, Peru, Ecuador and Chile and — hopefully soon — Mercosur itself. …

inputs from anywhere in that network would count as domestic content, enabling a Brazilian manufacturer to use Mexican parts and still qualify for zero tariffs in Hamburg. …

For Brussels, the path is clear: ratify the EU-Mercosur agreement, then deploy technical negotiations on cumulation of origin and MRAs to weave the wider FTA network.

For Latin America’s capitals, the task is equally vital: treat bilateral deals not as endpoints, but as stepping-stones toward region-wide integration at EU standards.

If leaders on both sides rise to the challenge, this will not be 'just another trade deal.' It will mark the dawn of a new transatlantic era in which the EU and Latin America stand shoulder to shoulder as partners in a single, sustainable, rules-based, economic project. The time is right. The moment is now.

And of course some of those countries are party to CPTPP, what the TPP became once the US withdrew from it, so the EU, the Americas (minus US but including Canada), Australasia, and ASEAN would all be linked in FTAs. Many of these countries have their own deals with China or are pursuing them. This also provides a mechanism for the UK to quietly re-join the EU, in effect, via the Commonwealth ties to Canada and Australia.

As I’ve been writing: there is already significant amounts of infrastructure for “re-routing global trade around the US,” as the article on India put it. More is being built every day. Where trade goes, finance eventually follows.

If I can find time I’ll plot these networks for you, and simulate some new links to show quickly the gaps can be closed to cut the US out. There are not many steps to take, and everything that has happened since “Liberation Day” has given the world plenty of incentive to take those steps. Quickly.

There are downsides to fractionalization. We’ll explore those later, but we’re already seeing some manifestations: divide-and-conquer strategies that lead to trade wars and security competitions, even border disputes and hot wars.