Globalization refers to the increasingly integrated nature of economies around the world. This integration has both positive and negative effects.
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.
Key Takeaways
- The benefits of globalization for countries include foreign direct investment and technological innovation.
- For companies, globalization allows for more efficient operations through economies of scale.
- The downsides of globalization include potential issues with interdependence and loss of sovereignty.
Positive Effects 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 realizeeconomies of scale. This reduces costs and prices, which in turn supports further growth. However, this can hurt manysmall businessestrying to compete at home.
Negative Effects 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. For example, in 2020, Ukraine was the fifth larger exporter of wheat. When Russia invaded the country, it threatened food supply chains for countries like Pakistan, Lebanon, and Vietnam that import Ukrainian wheat.
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.
Two prominent examples of the rise of nationalism as a pushback to globalism include the 2016 election of Donald Trump in the U.S. and the British vote to leave the European Union (known as "Brexit"). These events contributed to the anti-globalization movement and stoked anti-immigration sentiments.
Equity Distribution
Thepros of globalizationcan be unfairly skewed toward rich nations or individuals, creating greater economic inequalities. For example, in the wake of NAFTA, the average net weekly pay for maquila workers was $55.77 in 1998—less than $2 more than the average cost for basic needs in the maquiladora trade zone.
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[s] 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, "let 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.
Protectionism Through Tariffs
The 2008 economic crisis led many politicians to question the merits of globalization. In 2007, worldwide capital inflows accounted for more than 20% of the world's GDP. By 2019, this figure fell to less than 5%.
The U.S. andEuropeintroduced 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%.
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.
Revenues from U.S. tariffs on Chinese imports increased from $32.9 billion in 2017 to $85 billion in 2021. American farmers hurt by China moving crop purchases to other countries were promised $28 billion in federal compensation.
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.
