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BIS Bulletin No 102: Regional Integration Amid Global Fragmentation

Core Content

This BIS Bulletin explores the role of regional integration in emerging market economies (EMEs) in the context of global fragmentation. It evaluates how trade and banking integration have evolved, their interplay, and the structural policies that could enhance regional cooperation.

Main Points

• Regional integration complements global integration rather than substituting for it. It acts as a buffer against global fragmentation, especially in EMEs.
• Emerging Asia is more integrated than other EME regions due to:
  • A higher share of manufacturing with complex supply chains.
  • The presence of regional financial centres such as Hong Kong SAR and Singapore, which provide deep capital pools.
• Trade and banking integration reinforce each other, with regional payment system integration reducing transaction costs and enabling cross-border financial services.
• Further regional integration requires:
  • Cross-border cooperation.
  • Targeted liberalisation in trade and banking sectors.

Key Trends in Trade and Banking Integration

Global Integration Trends

• Before the 2010s, global trade expanded faster than GDP, with complex value chains spanning major regions.
• After the 2017 US-China trade conflict, regional trade integration deepened across EMEs.
• Global banking integration declined significantly after the financial crisis and has not recovered much since.

Regional Integration Trends

• Intraregional trade is more prominent in emerging Asia and Latin America, especially in manufacturing.
• In Latin America, 2.7% of goods value added comes from regional demand, while 40% comes from external demand.
• In emerging Asia, 20% of goods value added comes from external demand, with China at 5.2% and the rest of emerging Asia at 14.5%.
• Services trade has grown faster than manufacturing trade in EMEs, driven by sectors like business services and information and communication technology.

Regional Supply Chain Integration

• Emerging Asia has more developed supply chains, with manufacturing accounting for over 70% of total exports in China, Korea, and Vietnam.
• Latin America is more reliant on primary goods (e.g., commodities), which account for over 50% of total exports.
• Mexico is an exception, with 80% of its exports going to the United States, highlighting its strong manufacturing base.
• China has increasingly diversified its trade partners, including more trade with emerging Asian economies, as a response to US-China trade tensions.

Regional Banking Integration

• Cross-border banking in EMEs is largely US dollar-denominated, which poses a challenge for deeper regional integration.
• Intraregional banking flows are more stable than those from outside the region, as measured by global financial shocks (e.g., US dollar index, VIX).
• Foreign bank subsidiaries in EMEs are often funded by local deposits and offer services similar to local banks, promoting competition and market depth.
• Regional financial centres in Hong Kong SAR and Singapore are central to emerging Asia’s banking integration, while adjacent advanced economies (e.g., the US, EU) are key in other regions.

Structural Policies to Promote Integration

• Identifying industries where countries can add value to each other is key to advancing regional trade integration.
• Reducing trade barriers and non-tariff measures (e.g., quotas, technical standards) can help deepen integration.
• Digitalisation of trade, protection of property rights, harmonisation of regulations, and macroeconomic stability are important for enhancing the effectiveness of free trade agreements.
• Increasing regional demand is essential to promote trade integration, as EMEs are becoming more significant in global manufacturing imports.
• Regional payments integration and cross-border supervisory cooperation are crucial for enabling efficient trade and banking services, with ASEAN Economic Community as a notable example of such efforts.

Conclusion

Regional integration among EMEs is not a substitute for global integration but rather a complementary force. It provides stability and resilience in the face of global fragmentation. To fully harness its potential, concerted efforts in trade liberalisation, banking sector reforms, and policy coordination are necessary. The role of regional financial centres and payment systems is particularly important in facilitating cross-border trade and banking activities.