The focus of this book by Kerry Chase is that the process of international trade liberalization has resulted in the development of three major regional economic blocs: the European Union, the North American Free Trade Agreement, and a partial regional agreement in Asia largely driven by Japan. These three economic blocs are known in business schools as the “triad” of Europe, North America, and Asia. In The Regional Multinationals (2005), I have shown that the majority of international trade and investment takes place within these triad blocs rather than between them, and that even the world's largest 500 firms average over 72% of their sales within their home region. Basically, the analysis by Chase is fully consistent with such findings.

Chapters 2 and 8 develop an analysis of the political economy of trade in a regional context. Chapter 2 develops a model where the key independent variables explaining trade policies are aspects of scale economies and data on intraregional trade. There are two key elements to this theory. First, the triad regional trade agreements have been developed due to lobbying pressures by firms seeking economies of scale. Second, the regional agreements have also been driven, especially in more recent years, by firms seeking rules to guarantee access to production-sharing networks that cross national borders. It is the interplay between these two factors that explains the rapid economic growth of the EU and NAFTA, in particular, and which should lead to an eventual regional trade agreement in Asia.

Chapter 3 and 4 are case studies that test the theoretical model in the interwar period. Chapter 3 applies it to Britain, Japan, and Germany. It is found that British firms achieved scale economies in manufacturing through the use of Imperial Preferences. These effectively locked in the British Commonwealth market for sales, but also tied in the resources and other value chain inputs required to develop a successful production network. In contrast, Japan and Germany lacked an effective economic empire, which, Chase argues, was one incentive for Japanese economic imperialism in Southeast Asia and for German expansion, leading to their military adventures in the Second World War.

Chapters 5, 6, and 7 test the basic model across the core triad regions of the EU (Chapter 5), NAFTA (Chapter 6), and Japan (Chapter 7). These chapters are fascinating in that Chase is able to develop convincing evidence that the dual aspects of the theory are required for successful regional integration. Significant coefficients leap out for scale and intraregional trade variables, and these are interpreted by the author in a novel manner. For example, scale economies and production networks were not fully developed in the EU until the 1992 measures were introduced. Similarly, although the Canada/U.S. Autopac was in effect, full scale economies and production network efficiencies were not realized in NAFTA until the Canada/U.S. Free Trade Agreement (CUFTA) of 1988 came into effect. Both in Europe and North America, production-sharing networks had been developing, but it was not until 1992 and 1988, respectively, that multinational enterprises (MNEs) were able to fully develop these networks in clusters spanning the national borders of each region. Chase shows, correctly, that outsourcing and offshoring are the mirror images of production-sharing networks. Thus, the concerns of trade unions about job losses are largely misplaced since home-based MNEs need to outsource within regional clusters in order to achieve efficient manufacturing production. Although he does not discuss this, the same logic for outsourcing and offshoring now applies to the service sector.

Another theme runs throughout the book. This is that multilateralism, in particular the successful rounds of trade liberalization at the GATT and World Trade Organization, is fully consistent with the new regionalism. Chase states that “extant trading blocs do not pose a threat to the multilateral trading system” (p. 261). The reasoning here is that the creation of the large trading blocs in the EU and NAFTA has been driven by firms working in accord with states. In simple terms, this means that regional trade agreements are efficiency driven. In fact, they often represent a set of rules being put in place to recognize the reality of existing regional economic integration, often driven by MNEs seeking production-sharing networks across borders. The author develops an interesting subtheme to the effect that while the EU discriminates against “outsiders,” the result is simply to speed up the substitution of foreign direct investment (FDI) for exports. This is efficiency enhancing; for example, FDI in the EU by U.S. MNEs turns the U.S. firms into “insiders.” Similarly, NAFTA's legal instruments to exclude outsiders, such as the rules of origin, also lead to Japanese MNEs increasing their FDI in the United States at the expense of exports. Thus, both in the EU and NAFTA, the deepening of the regional trade agreements has led to increased inward FDI and cross investments by MNEs. The result is a greater degree of international integration by MNEs operating across the broad triad regions.

The analysis in this book by a political scientist is more consistent with the thinking in business schools by scholars of international business. Indeed, many of the theories and cases in Trading Blocs were anticipated by international business scholars in work published some ten to twenty years ago. In contrast, the work by Chase would raise tensions with traditional trade economists, such as Jagdish Bhagwati since they are still influenced by fairly static concepts of comparative advantage. Chase has positioned his theory as a dynamic one that cleverly integrates increasing returns to scale with the more recent development of production-sharing networks, where the latter is difficult for economists to model. Economists traditionally ignore the strategic dimension of MNEs and the alliances and joint ventures that are often required to develop successful and efficient production-sharing networks across borders. My conclusion is that this book will be more favorably received in business schools than in economics departments. Its reception in political science departments will depend partly on the legacy of vested interests. Chase himself states that “these findings challenge work in the field that explains trading blocs in terms of alliances and power politics, transaction costs in multilateral negotiations, and intergovernmental bargains among nations” (p. 257). However, my reading of the book is that his focus on economic efficiency and the role of MNEs in developing economies of scale and production-sharing networks across national borders is fairly consistent with these related explanations of multilateral trade liberalization. In other words, the new regionalism created by MNEs is the driver behind globalization in terms of the increased international economic integration we all observe in the data on trade and FDI.