The Impact of Globalization on Economic Growth

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The aim of globalization is to benefit individual economies around the world by making markets more efficient, increasing competition, limiting military conflicts, and spreading wealth more equally.

Globalization and its Impact on Economic Growth
The Balance

Globalization Benefits World Economies

The Milken Institute’s "Globalization of the World Economy" report of 2003 highlighted many of the benefits associated with globalization while outlining some of the associated risks that governments and investors should consider. The principles of this report still remain relevant.

Some of the benefits of globalization include:

  • Foreign Direct Investment: Foreign direct investment (FDI) tends to increase at a much greater rate than the growth in world trade, helping boost technology transfer, industrial restructuring, and the growth of global companies.
  • Technological Innovation: Increased competition from globalization helps stimulate new technology development, particularly with the growth in FDI, which helps improve economic output by making processes more efficient.
  • Economies of Scale: Globalization enables large companies to realize economies of scale that reduce costs and prices, which in turn supports further economic growth, although this can hurt many small businesses attempting to compete domestically.

Some of the risks of globalization include:

  • Interdependence: Globalization leads to the interdependence between nations, which could cause regional or global instabilities if local economic fluctuations end up impacting a large number of countries relying on them.
  • National Sovereignty: Some see the rise of nation-states, multinational or global firms, and other international organizations as a threat to sovereignty. Ultimately, this could cause some leaders to become nationalistic or xenophobic.
  • Equity Distribution: The benefits of globalization can be unfairly skewed towards rich nations or individuals, creating greater inequalities and leading to potential conflicts both nationally and internationally as a result.

Writing in the quarterly Milken Institute Review in late 2017, Dani Rodrik, author of “Straight Talk on Trade: Ideas for a Sane World Economy,” argued that a rebalancing of globalization is necessary to restore more voice to labor and its needs for job and income stability while focusing attention globally 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. Global cross-border capital flows shrank by 65% between 2007 and 2016, according to a McKinsey Global Institute analysis of data from the International Monetary Fund. The decrease from $12.4 trillion to $4.3 trillion in those nine years includes declines in lending, FDI, and equity and bond purchases.

In the U.S. and Europe, new banking regulations were introduced that limited capital flows. Tariffs have been put in place at times to protect domestic industries seen as vital, such as a 127% U.S. tariff on Chinese paper clips or Japan’s 778% tariff on imported rice. In Brazil—where import tariffs run between 10% and 35%—the new government announced in May 2019 that it plans to reduce them by 10 percentage points over the next four years.

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

The Picture in 2019 Is Blurry

Economists suggest cross-border investments in 2019 are not being made so much to build capital infrastructure as they are to seek countries with the lowest taxes.

Some form of globalization may be inevitable over the long-run, but the historic bumps spurred by economic crises and other consequences suggest the only reliable constant is change.

Escalated U.S. tariffs on Chinese imports raised $20.8 billion through mid-July 2019, according to U.S. Customs and Border Protection. American farmers hurt by China diverting crop purchases to other countries were promised $28 billion in federal compensation, making it an overall net loss.