The Impact of Globalization on Economic Growth

This illustration shows the globalization and its impact on economic growth.

The Balance

The goal of globalization is to boost economies around the world by making markets more efficient. The hope is that increased global trade will lead to more competition, which will spread wealth more equally. Those who are in favor also claim that trade across borders will help limit military conflicts.

However, there are downsides to boosting trade between countries. Some critics point to globalization as a factor in rising nationalism and income inequality, among other issues.

Learn more about the pros and cons of globalization to understand how it affects economies and individuals.

What Are the Benefits of Globalization?

The Milken Institute's "Globalization of the World Economy" report of 2003 noted many of the pros and cons of globalization. Although nearly two decades have passed since the report came out, the ideas behind it remain relevant.

Some of the pros of increased global trade include:

Foreign Direct Investment

Foreign direct investment (FDI) tends to grow at a much greater rate than world trade does. This can help to boost technology transfer, industrial restructuring, and the growth of global companies.

Technological Innovation

Increased competition helps inspire new technology development. The growth in FDI helps improve economic output by making processes more efficient.

Economies of Scale

Increased global trade enables large companies to realize economies of scale. This reduces costs and prices, which in turn supports further growth. However, this can hurt many small businesses trying to compete at home.

What Are the Risks of Globalization?

Some of the risks of increased global trade include:

Interdependence

Interdependence between nations can cause local or global instability. This occurs if local economic fluctuations end up impacting a large number of countries relying on them.

National Sovereignty

Some see the rise of nation-states, global firms, and other international organizations as a threat to sovereignty. Ultimately, this could cause some leaders to become nationalistic.

Equity Distribution

The pros of globalization can be unfairly skewed toward rich nations or individuals, creating greater economic inequalities.

Dani Rodrik, author of Straight Talk on Trade: Ideas for a Sane World Economy, argues for a rebalancing of globalization.

In a 2017 piece for the Milken Institute Review, Rodrik notes that current policies "produce losers as well as winners." For instance, workers are left with a less stable labor market. In Europe, these workers were given a strong social safety net. The U.S., Rodrik says, "lets the chips (and workers) fall where they may."

To fix globalization's problems while keeping benefits, Rodrik suggests several changes. Chief among them: giving labor a stronger voice, shifting from global governance to national governance, and focusing attention on where the biggest economic gains can be made.

Tariffs and Other Forms of Protectionism

The 2008 economic crisis led many politicians to question the merits of globalization. According to a McKinsey Global Institute analysis of IMF data, cross-border capital flows shrank by 65% between 2007 and 2016. The decrease from $12.4 trillion to $4.3 trillion in those nine years includes declines in lending, FDI, and equity and bond purchases.

The U.S. and Europe introduced new banking regulations that limited capital flows. Many countries put in place tariffs to protect vital industries at home. In the 1990s, the U.S. placed a 127% tariff on Chinese paper clips. And Japan has levied tariffs on imported rice as high as 778%.

The 2016 election of Donald Trump in the U.S. and the British vote to leave the European Union (known as  "Brexit") have also contributed to the anti-globalization movement. These trends have been driven by anti-immigration sentiments in Europe. However, the 2018 election results veer more pro- than anti-globalization.

Future Outlook

Some economists suggest that businesses are not investing across borders to build capital infrastructure. They argue that companies seek countries with low taxes. Some form of globalization may be inevitable in the long run, but the historic bumps spurred by economic crises suggest that change is the only constant.

According to U.S. Customs and Border Protection, higher U.S. tariffs on Chinese imports raised $20.8 billion through mid-July 2019. American farmers hurt by China moving crop purchases to other countries were promised $28 billion in federal compensation. This made the change an overall net loss of over $7 billion.

Frequently Asked Questions (FAQs)

When did globalization begin?

Economists differ on when globalization began. Some point to people like Christopher Columbus as an early force of globalization in the 15th century. Others point back thousands of years to the founding of the Silk Road. Both the World Economic Forum and the National Bureau of Economic Research argue that the technological advancements of the 19th century allowed it to become the first true era of globalization.

Which countries are the least affected by globalization?

Some countries rely more or less on global trade than others. The KOF Swiss Economic Institute scores countries on a globalization index. Afghanistan and Somalia were among the lowest-scoring countries on that index. More isolated countries, like North Korea, didn't score on the index at all.