The Global Economy’s New Geography

The Global Economy’s New Geography, by Salvador Babones.

More important than the physical geography of trade is the human geography of institutions. The US and UK share a language, a financial infrastructure, a business culture, a legal heritage, and a way of thinking. In quitting Europe, Brexit backers voted to rejoin the larger world. …

The ultimate cause of the Brexit vote wasn’t immigration. It was economics. … More British citizens work in the United States than in continental Europe. …

Britain’s Brexit vote is merely a reflection of larger global economic patterns that create little incentive for Britain to tie itself to the second-rate Western European economy.

Britain’s finance industry has long been more closely tied to New York than to Frankfurt or Paris. The rest of the economy may soon follow. Even before Brexit, British investment in continental Europe was declining while British investment in North America has been rising. …

From an economic standpoint, Brexit boils down to a question about where British companies most want to do business. Is it in Western Europe, or in North America? …

Today’s global economy consists of three major economic regions — North America, Western Europe and East Asia — surrounded by a large number of economically isolated countries. Russia and central Asia, India and south Asia, the countries of the Middle East and North Africa, the countries of sub-Saharan Africa, the countries of central America, and the countries of South America are all isolates in the global economy. All of them trade more with the three major economic regions than with their own neighbours. …

Taken together the world’s three major economic regions have a combined GDP of around $60 trillion, constituting some 80 per cent of global economic output. …

But the three major economic regions are not equal, or even roughly equal. … GDP per capita in the United States is 36 per cent higher than in Germany and 69 per cent higher than in Japan. The differences are substantial.

When the United States is decomposed into its constituent economic units, the differences become overwhelming. The north-eastern United States — the core of the North American economy, running from northern Virginia through Washington, New York and Boston — is 50 per cent richer than Germany and nearly twice as rich as Japan. In economic terms, if Germany were a US state it would be on a par with Alabama. If Japan were a US state it would be Mississippi. …

If the UK is destined by geography to be embedded in global value chains, the new economic geography suggests that it should hitch its wagon to North America, not Western Europe.

The UK may no longer be a global centre, but if it has to be on the periphery it makes more sense to be on the periphery of New York than to be on the periphery of Alabama (that is, Germany). The North American economy has a primary core in the north-eastern United States and a secondary core on the West Coast. There is no reason it couldn’t have a third core in England.

Los Angeles is six hours by air from New York. London is only seven. Rail freight takes five days to travel from Los Angeles to New York—when not delayed by weather or congestion. London to New York is a reliable ten days by container ship. …

Although Western Europe and East Asia are physically located on the same continent, it still takes a container thirty days at sea to get from Shanghai to Rotterdam. The new Chinese rail service across Eurasia still takes twenty days—and costs three times as much. In contrast, a container takes just fifteen days to cross the Pacific from Shanghai to Los Angeles. The idea that China and Japan are in the east is an outmoded, Eurocentric view of the world. East Asia is not to the east of Europe. In the economic geography of world trade, East Asia is to the west of California. …

Politics and personal feelings aside, the simple fact is that North America is economically much more dynamic than the European Union. The difference becomes overwhelmingly clear when you look at the online economy of the twenty-first century. Many British people, Londoners especially, may feel European in outlook. But those same Londoners are much more likely to have careers that include spells in New York or Los Angeles than in Paris or Berlin. They may feel European, but they work American.

Brexit was a vote about identity and sovereignty. But identity and sovereignty are both shaped by economics. As the world’s economic structure draws Britain inexorably into the North American orbit, British identity and sovereignty will follow. Identity, because British people will find themselves spending more and more time working in North America or in North American companies, interacting with North American social media, and participating (as interested spectators at least) in North American politics. Sovereignty, because the governance rules that most strongly affect British business life will increasingly emanate from Washington, not Brussels. …

From an economic standpoint, Brexit should not be understood as Britain leaving the European Union. It should be understood as Britain rejoining the world. The global economic world is centred on North America, the new digital economy overwhelmingly so. It is a very open world that British people intuitively understand. After all, they invented it. Brexit gives the British people an opportunity to return to the global economic centre. They can always holiday in Europe.

hat-tip Stephen Neil