essay about effects of globalization

An economist explains the pros and cons of globalization

Piling up: Global trade has increased, but has it been a positive or negative force? Image:  REUTERS/Tyrone Siu

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Every industrial revolution has driven a wave of globalization. The first wave was driven by innovations such as the steam engine and the industrial weaving machine; the second by the assembly line, the car and the plane; and the third by the digital revolution.

As we enter the fourth wave of globalization, driven by the digital revolution, there is renewed debate over whether it is a beneficial force: powering economic growth, and allowing the spread of ideas to improve people’s lives; or whether it erodes communities, and widens the gap between the elites and the rest of the world.

Globalization results in increased trade and lower prices. It heightens competition within domestic product, capital, and labour markets, as well as among countries adopting different trade and investment strategies.

But how do these impacts net out? What are the positive and negative effects of globalization? The below is an edited transcript of a conversation with Gita Gopinath, Chief Economist of the International Monetary Fund (IMF).

Overall, what are the advantages of globalization?

The advantages of globalization are actually much like the advantages of technological improvement. They have very similar effects: they raise output in countries, raise productivity, create more jobs, raise wages, and lower prices of products in the world economy.

What might be the advantages of globalization that someone would feel in their day-to-day life?

I think something that's not sufficiently appreciated about, for instance, international trade is that it reduces the prices of goods that they consume. So if you look at day-to-day things that you purchase, in terms of washing machines, or cars, or even clothing, because of international trade we've had a decline in prices of these goods, so they have become far more affordable for a lot of people in the world.

How have the benefits played out in advanced economies versus poorer ones over the last three decades?

Both advanced economies and developing economies have benefited overall in terms of having higher productivity, more job creation, and higher wages. As we've always known, and this is true again with technology, there are always some winners and losers. So there are communities and there are workers who lose out when there is more trade integration. That is what we're seeing right now in terms of discontent with international trade.

Who have been the biggest losers?

The biggest losers from international trade are always those whose skills have a cheaper competitor in a different market. So, in the case of the US, it's been those who work in the manufacturing sector because jobs in the manufacturing sector have been outsourced to countries where labour is far cheaper.

On the other hand, in developing countries, more capital-intensive goods get imported more cheaply from the outside. So if you're a manufacturer of a capital-intensive good in a developing country you tend to lose because of that competition.

This is how it is with international trade: production goes to wherever it is most efficient to produce. So, when people in any country are exposed to this kind of competition, some win and some lose.

Is it possible as an economist to come up with a verdict? Has this wave of globalized trade been a net positive or a net negative?

If you say, I'm going to look at it from a measure of overall effect on a country's income, on its purchasing power, on the prices that its people pay, overall I think the evidence that we have all points to it being a net positive.

Now, if you frame the question as, has international trade been good for the manufacturing worker in the US? Then the answer to that would be “not fully”; it's been very costly in terms of jobs and wages for them.

How optimistic are you that this next wave of globalization offers a better future?

I would make a couple of points. First, the previous waves of globalization have been quite successful in lifting a large number of people out of poverty and so we should appreciate that.

The second thing is that any form of globalization will generate winners and losers. So even if you have the perfect, most optimal international trade agreements, there will always be those who lose out because of competition, in the exact same way that people lose out whenever there's a new technology being developed.

And so if we want to make sure that the next wave of globalization is even more successful, it has to be complemented with good, sound domestic policies that help those who are getting left out.

How optimistic are you that the trade war between the US and China will be swiftly resolved?

It's absolutely essential that it be resolved, and it gets resolved in a way that's long lasting. The world economy has lived with the uncertainty about trade tensions for a while now and if there is any solution and there is a sense that the solution is only transitory and something can again get triggered in the future, I think that's very costly.

I'd say I'm mildly optimistic because I think leaders in the world are recognizing that these trade tensions are having a negative effect on their economies and so it would make sense to sit down and resolve it.

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Globalization: Definition, Benefits, Effects, Examples – What is Globalization?

• Publié le 21 January 2019
• Mis à jour le 25 March 2024

Globalization – what is it? What is the definition of globalization? Benefits and negative effects? What are the top examples of globalization? What famous quotes have been said about globalization?

What is Globalization? All Definitions of Globalization

A simple globalization definition.

Globalization means the speedup of movements and exchanges (of human beings, goods, and services, capital, technologies or cultural practices) all over the planet. One of the effects of globalization is that it promotes and increases interactions between different regions and populations around the globe.

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An Official Definition of Globalization by the World Health Organization (WHO)

According to WHO , globalization can be defined as ” the increased interconnectedness and interdependence of peoples and countries. It is generally understood to include two inter-related elements: the opening of international borders to increasingly fast flows of goods, services, finance, people and ideas; and the changes in institutions and policies at national and international levels that facilitate or promote such flows.”

What Is Globalization in the Economy?

According to the Committee for Development Policy (a subsidiary body of the United Nations), from an economic point of view, globalization can be defined as: “(…) the increasing interdependence of world economies as a result of the growing scale of cross-border trade of commodities and services, the flow of international capital and the wide and rapid spread of technologies. It reflects the continuing expansion and mutual integration of market frontiers (…) and the rapid growing significance of information in all types of productive activities and marketization are the two major driving forces for economic globalization.”

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What Is Globalization in Geography?

In geography, globalization is defined as the set of processes (economic, social, cultural, technological, institutional) that contribute to the relationship between societies and individuals around the world. It is a progressive process by which exchanges and flows between different parts of the world are intensified.

Globalization and the G20: What is the G20?

The G20 is a global bloc composed by the governments and central bank governors from 19 countries and the European Union (EU). Established in 1999, the G20 gathers the most important industrialized and developing economies to discuss international economic and financial stability. Together, the nations of the G20 account for around 80% of global economic output, nearly 75 percent of all global trade, and about two-thirds of the world’s population.

G20 leaders get together in an annual summit to discuss and coordinate pressing global issues of mutual interest. Though economics and trade are usually the centerpieces of each summit’s agenda, issues like climate change, migration policies, terrorism, the future of work, or global wealth are recurring focuses too. Since the G20 leaders represent the “ political backbone of the global financial architecture that secures open markets, orderly capital flows, and a safety net for countries in difficulty”, it is often thanks to bilateral meetings during summits that major international agreements are achieved and that globalization is able to move forward.

The joint action of G20 leaders has unquestionably been useful to save the global financial system in the 2008/2009 crisis, thanks to trade barriers removal and the implementation of huge financial reforms. Nonetheless, the G20 was been struggling to be successful at coordinating monetary and fiscal policies and unable to root out tax evasion and corruption, among other downsides of globalization. As a result of this and other failures from the G20 in coordinating globalization, popular, nationalist movements across the world have been defending countries should pursue their interests alone or form fruitful coalitions.

How Do We Make Globalization More Just?

The ability of countries to rise above narrow self-interest has brought unprecedented economic wealth and plenty of applicable scientific progress. However, for different reasons, not everyone has been benefiting the same from globalization and technological change: wealth is unfairly distributed and economic growth came at huge environmental costs. How can countries rise above narrow self-interest and act together or designing fairer societies and a healthier planet? How do we make globalization more just?

According to Christine Lagarde , former President of the International Monetary Fund, “ debates about trade and access to foreign goods are as old as society itself ” and history tells us that closing borders or protectionism policies are not the way to go, as many countries doing it have failed.

Lagarde defends we should pursue globalization policies that extend the benefits of openness and integration while alleviating their side effects. How to make globalization more just is a very complex question that involves redesigning economic systems. But how? That’s the question.

Globalization is deeply connected with economic systems and markets, which, on their turn, impact and are impacted by social issues, cultural factors that are hard to overcome, regional specificities, timings of action and collaborative networks. All of this requires, on one hand, global consensus and cooperation, and on the other, country-specific solutions, apart from a good definition of the adjective “just”.

When Did Globalization Begin? The History of Globalization

For some people, this global phenomenon is inherent to human nature. Because of this, some say globalization begun about 60,000 years ago, at the beginning of human history. Throughout time, human societies’ exchanging trade has been growing. Since the old times, different civilizations have developed commercial trade routes and experienced cultural exchanges. And as well, the migratory phenomenon has also been contributing to these populational exchanges. Especially nowadays, since traveling became quicker, more comfortable, and more affordable.

This phenomenon has continued throughout history, notably through military conquests and exploration expeditions. But it wasn’t until technological advances in transportation and communication that globalization speeded up. It was particularly after the second half of the 20th century that world trades accelerated in such a dimension and speed that the term “globalization” started to be commonly used.

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Examples of Globalization (Concept Map)

Because of trade developments and financial exchanges, we often think of globalization as an economic and financial phenomenon. Nonetheless, it includes a much wider field than just flowing of goods, services or capital. Often referred to as the globalization concept map, s ome examples of globalization are:

• Economic globalization : is the development of trade systems within transnational actors such as corporations or NGOs;
• Financial globalization : can be linked with the rise of a global financial system with international financial exchanges and monetary exchanges. Stock markets, for instance, are a great example of the financially connected global world since when one stock market has a decline, it affects other markets negatively as well as the economy as a whole.
• Cultural globalization : refers to the interpenetration of cultures which, as a consequence, means nations adopt principles, beliefs, and costumes of other nations, losing their unique culture to a unique, globalized supra-culture;
• Political globalization : the development and growing influence of international organizations such as the UN or WHO means governmental action takes place at an international level. There are other bodies operating a global level such as NGOs like Doctors without borders  or Oxfam ;
• Sociological globalization : information moves almost in real-time, together with the interconnection and interdependence of events and their consequences. People move all the time too, mixing and integrating different societies;
• Technological globalization: the phenomenon by which millions of people are interconnected thanks to the power of the digital world via platforms such as Facebook, Instagram, Skype or Youtube.
• Geographic globalization: is the new organization and hierarchy of different regions of the world that is constantly changing. Moreover, with transportation and flying made so easy and affordable, apart from a few countries with demanding visas, it is possible to travel the world without barely any restrictions;
• Ecological globalization: accounts for the idea of considering planet Earth as a single global entity – a common good all societies should protect since the weather affects everyone and we are all protected by the same atmosphere. To this regard, it is often said that the poorest countries that have been polluting the least will suffer the most from climate change .

The Benefits of Globalization

Globalization has benefits that cover many different areas. It reciprocally developed economies all over the world and increased cultural exchanges. It also allowed financial exchanges between companies, changing the paradigm of work. Many people are nowadays citizens of the world. The origin of goods became secondary and geographic distance is no longer a barrier for many services to happen. Let’s dig deeper.

The Engine of Globalization – An Economic Example

The most visible impacts of globalization are definitely the ones affecting the economic world. Globalization has led to a sharp increase in trade and economic exchanges, but also to a multiplication of financial exchanges.

In the 1970s world economies opened up and the development of free trade policies accelerated the globalization phenomenon. Between 1950 and 2010, world exports increased 33-fold. This significantly contributed to increasing the interactions between different regions of the world.

This acceleration of economic exchanges has led to strong global economic growth. It fostered as well a rapid global industrial development that allowed the rapid development of many of the technologies and commodities we have available nowadays.

Knowledge became easily shared and international cooperation among the brightest minds speeded things up. According to some analysts, globalization has also contributed to improving global economic conditions, creating much economic wealth (thas was, nevertheless, unequally distributed – more information ahead).

Globalization Benefits – A Financial Example

At the same time, finance also became globalized. From the 1980s, driven by neo-liberal policies, the world of finance gradually opened. Many states, particularly the US under Ronald Reagan and the UK under Margaret Thatcher introduced the famous “3D Policy”: Disintermediation, Decommissioning, Deregulation.

The idea was to simplify finance regulations, eliminate mediators and break down the barriers between the world’s financial centers. And the goal was to make it easier to exchange capital between the world’s financial players. This financial globalization has contributed to the rise of a global financial market in which contracts and capital exchanges have multiplied.

Globalization – A Cultural Example

Together with economic and financial globalization, there has obviously also been cultural globalization. Indeed, the multiplication of economic and financial exchanges has been followed by an increase in human exchanges such as migration, expatriation or traveling. These human exchanges have contributed to the development of cultural exchanges. This means that different customs and habits shared among local communities have been shared among communities that (used to) have different procedures and even different beliefs.

Good examples of cultural globalization are, for instance, the trading of commodities such as coffee or avocados. Coffee is said to be originally from Ethiopia and consumed in the Arabid region. Nonetheless, due to commercial trades after the 11th century, it is nowadays known as a globally consumed commodity. Avocados , for instance, grown mostly under the tropical temperatures of Mexico, the Dominican Republic or Peru. They started by being produced in small quantities to supply the local populations but today guacamole or avocado toasts are common in meals all over the world.

At the same time, books, movies, and music are now instantaneously available all around the world thanks to the development of the digital world and the power of the internet. These are perhaps the greatest contributors to the speed at which cultural exchanges and globalization are happening. There are also other examples of globalization regarding traditions like Black Friday in the US , the Brazilian Carnival or the Indian Holi Festival. They all were originally created following their countries’ local traditions and beliefs but as the world got to know them, they are now common traditions in other countries too.

Why Is Globalization Bad? The Negative Effects of Globalization

Globalization is a complex phenomenon. As such, it has a considerable influence on several areas of contemporary societies. Let’s take a look at some of the main negative effects globalization has had so far.

The Negative Effects of Globalization on Cultural Loss

Apart from all the benefits globalization has had on allowing cultural exchanges it also homogenized the world’s cultures. That’s why specific cultural characteristics from some countries are disappearing. From languages to traditions or even specific industries. That’s why according to UNESCO , the mix between the benefits of globalization and the protection of local culture’s uniqueness requires a careful approach.

The Economic Negative Effects of Globalization

Despite its benefits, the economic growth driven by globalization has not been done without awakening criticism. The consequences of globalization are far from homogeneous: income inequalities, disproportional wealth and trades that benefit parties differently. In the end, one of the criticisms is that some actors (countries, companies, individuals) benefit more from the phenomena of globalization, while others are sometimes perceived as the “losers” of globalization. As a matter of fact, a recent report from Oxfam says that 82% of the world’s generated wealth goes to 1% of the population.

• Related: Globally, Business And Government Lack Trust, A New Survey Shows

The Negative Effects of Globalization on the Environment

At the same time, global economic growth and industrial productivity are both the driving force and the major consequences of globalization. They also have big environmental consequences as they contribute to the depletion of natural resources, deforestation and the destruction of ecosystems and loss of biodiversity . The worldwide distribution of goods is also creating a big garbage problem, especially on what concerns plastic pollution .

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Globalization, Sustainable Development, and CSR

Globalization affects all sectors of activity to a greater or lesser extent. By doing so, its gap with issues that have to do with  sustainable development  and  corporate social responsibility  is short.

By promoting large-scale industrial production and the globalized circulation of goods, globalization is sometimes opposed to concepts such as resource savings, energy savings or the limitation of greenhouse gases . As a result, critics of globalization often argue that it contributes to accelerating climate change and that it does not respect the principles of ecology. At the same time, big companies that don’t give local jobs and choose instead to use the manpower of countries with low wages (to have lower costs) or pay taxes in countries with more favorable regulations is also opposed to the criteria of a CSR approach. Moreover, the ideologies of economic growth and the constant pursuit of productivity that come along with globalization, also make it difficult to design a sustainable economy based on  resilience .

On the other hand, globalization is also needed for the transitioning to a more sustainable world, since only a global synergy would really be able to allow a real ecological transition. Issues such as global warming indeed require a coordinated response from all global players: fight against CO2 emissions, reduction of waste, a transition to renewable energies . The same goes for ocean or air pollution, or ocean acidification, problems that can’t be solved without global action. The dissemination of green ideas also depends on the ability of committed actors to make them heard globally.

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The Road From Globalization to Regionalization

Regionalization can also be analyzed from a corporate perspective. For instance, businesses such as McDonald’s or Starbucks don’t sell exactly the same products everywhere. In some specific stores, they consider people’s regional habits. That’s why the McChicken isn’t sold in India, whereas in Portugal there’s a steak sandwich menu like the ones you can get in a typical Portuguese restaurant.

Politically speaking, when left-wing parties are in power they tend to focus on their country’s people, goods and services. Exchanges with the outside world aren’t seen as very valuable and importations are often left aside.

• Related: Why Is It Important To Support Local And Small Businesses?

Globalization Quotes by World Influencers

Many world leaders, decision-makers and influential people have spoken about globalization. Some stand out its positive benefits and others focus deeper on its negative effects. Find below some of the most interesting quotes on this issue.

Politic Globalization Quotes

Globalization quote by the former U.S President Bill Clinton ??

No generation has had the opportunity, as we now have, to build a global economy that leaves no-one behind. It is a wonderful opportunity, but also a profound responsibility.

Globalization quote by Barack Obama , former U.S. president ??

Globalization is a fact, because of technology, because of an integrated global supply chain, because of changes in transportation. And we’re not going to be able to build a wall around that.

Globalization quote by Dominique Strauss-Kahn, former International Monetary Fund Managing Director ??

“We can’t speak day after day about globalization without at the same time having in mind that…we need multilateral solutions.”

Globalization quote by Stephen Harper , former Prime Minister of Canada ??

“We have to remember we’re in a global economy. The purpose of fiscal stimulus is not simply to sustain activity in our national economies but to help the global economy as well, and that’s why it’s so critical that measures in those packages avoid anything that smacks of protectionism.”

Globalization quote by Julia Gillard , Prime Minister of Australia ??

“My guiding principle is that prosperity can be shared. We can create wealth together. The global economy is not a zero-sum game.”

Other Globalization Quotes

Globalization quote by the spiritual leader Dalai Lama ??

“I find that because of modern technological evolution and our global economy, and as a result of the great increase in population, our world has greatly changed: it has become much smaller. However, our perceptions have not evolved at the same pace; we continue to cling to old national demarcations and the old feelings of ‘us’ and ‘them’.”

The famous German sociologist Ulrich Beck also spoke of globalization ??

“Globalization is not only something that will concern and threaten us in the future, but something that is taking place in the present and to which we must first open our eyes.”

Globalization quote by Bill Gates, owner and former CEO of Microsoft ??

“The fact is that as living standards have risen around the world, world trade has been the mechanism allowing poor countries to increasingly take care of really basic needs, things like vaccination.”

Globalization quote by John Lennon, member of the music band The Beatles ??

Imagine there’s no countries. It isn’t hard to do. Nothing to kill or die for. And no religion, too. Imagine all the people. Living life in peace. You, you may say I’m a dreamer. But I’m not the only one. I hope someday you will join us. And the world will be as one

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Effects of Globalization

How It Impacts Society and the Economy

Positive Effects of Globalization

Negative effects of globalization, protectionism through tariffs, future outlook, frequently asked questions (faqs).

The Balance

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.

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.

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

The pros of globalization can 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.

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. 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%.

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.

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.

Milken Institute. " Globalization of the World Economy ," Pages 2-9.

Organisation for Economic Co-operation and Development. " Foreign Direct Investment for Development ," Page 5.

Milken Institute. " Globalization of the World Economy ," Page 9.

Milken Institute. " Globalization of the World Economy ," Page 10.

Milken Institute. " Globalization of the World Economy ," Page 12.

Observatory of Economic Complexity. " Wheat in Ukraine ."

Homeland Security Digital Library. " Globalization vs. National Sovereignty ."

The World Bank. " Theorist Eric Maskin: Globalization Is Increasing Inequality ."

Washington University in St. Louis. " The Pros and Cons of Globalization ," Page 3.

Milken Institute Review. " The Trouble With Globalization ," Page 2.

Bank for International Settlements. " Changing Patterns of Capital Flows ," Page 4.

Federal Register. " Certain Paper Clips From the People's Republic of China: Final Results of Expedited Fourth Sunset Review of Antidumping Duty Order ."

Food and Fertilizer Technology Center for the Asian and Pacific Region. " Trade Liberalization and Rice Farming in Japan and Heilongjiang China ."

Center for Strategic and International Studies. " China Tariffs: Digging Out of the Hole ."

American Enterprise Institution. " Agricultural Trade Aid ," Page 1.

World Economic Forum. " A Brief History of Globalization ."

National Bureau of Economic Research. " When Did Globalization Begin? ," Pages 1-2, 26-28.

KOF Swiss Economic Institute. " KOF Globalisation Index ," Download "Ranking_2021" XLSX.

ENCYCLOPEDIC ENTRY

Globalization.

Globalization is a term used to describe the increasing connectedness and interdependence of world cultures and economies.

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Globalization is a term used to describe how trade and technology have made the world into a more connected and interdependent place. Globalization also captures in its scope the economic and social changes that have come about as a result. It may be pictured as the threads of an immense spider web formed over millennia, with the number and reach of these threads increasing over time. People, money, material goods, ideas, and even disease and devastation have traveled these silken strands, and have done so in greater numbers and with greater speed than ever in the present age. When did globalization begin? The Silk Road, an ancient network of trade routes across China, Central Asia, and the Mediterranean used between 50 B.C.E. and 250 C.E., is perhaps the most well-known early example of exchanging ideas, products, and customs. As with future globalizing booms, new technologies played a key role in the Silk Road trade. Advances in metallurgy led to the creation of coins; advances in transportation led to the building of roads connecting the major empires of the day; and increased agricultural production meant more food could be trafficked between locales. Along with Chinese silk, Roman glass, and Arabian spices, ideas such as Buddhist beliefs and the secrets of paper-making also spread via these tendrils of trade. Unquestionably, these types of exchanges were accelerated in the Age of Exploration, when European explorers seeking new sea routes to the spices and silks of Asia bumped into the Americas instead. Again, technology played an important role in the maritime trade routes that flourished between old and newly discovered continents. New ship designs and the creation of the magnetic compass were key to the explorers’ successes. Trade and idea exchange now extended to a previously unconnected part of the world, where ships carrying plants, animals, and Spanish silver between the Old World and the New also carried Christian missionaries. The web of globalization continued to spin out through the Age of Revolution, when ideas about liberty , equality , and fraternity spread like fire from America to France to Latin America and beyond. It rode the waves of industrialization , colonization , and war through the eighteenth, nineteenth, and twentieth centuries, powered by the invention of factories, railways, steamboats, cars, and planes. With the Information Age, globalization went into overdrive. Advances in computer and communications technology launched a new global era and redefined what it meant to be “connected.” Modern communications satellites meant the 1964 Summer Olympics in Tokyo could be watched in the United States for the first time. The World Wide Web and the Internet allowed someone in Germany to read about a breaking news story in Bolivia in real time. Someone wishing to travel from Boston, Massachusetts, to London, England, could do so in hours rather than the week or more it would have taken a hundred years ago. This digital revolution massively impacted economies across the world as well: they became more information-based and more interdependent. In the modern era, economic success or failure at one focal point of the global web can be felt in every major world economy. The benefits and disadvantages of globalization are the subject of ongoing debate. The downside to globalization can be seen in the increased risk for the transmission of diseases like ebola or severe acute respiratory syndrome (SARS), or in the kind of environmental harm that scientist Paul R. Furumo has studied in microcosm in palm oil plantations in the tropics. Globalization has of course led to great good, too. Richer nations now can—and do—come to the aid of poorer nations in crisis. Increasing diversity in many countries has meant more opportunity to learn about and celebrate other cultures. The sense that there is a global village, a worldwide “us,” has emerged.

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4 Effects of Globalization on the Environment

• 15 Apr 2021

Globalization —defined in the online course Global Business as the increased flow of goods, services, capital, people, and ideas across international boundaries—has brought many changes in its wake.

While globalization can positively and negatively impact society, its effect on the environment is primarily negative. Here’s a breakdown of how globalization impacts society and the environment and what business leaders can do to reduce these negative consequences.

How Does Globalization Affect Society?

The world has become more connected than ever before through the increase in technological advancements and economic integrations. Advanced economies are formed as domestic businesses transform into international ones and further contribute to the spread of technology around the world.

There are several benefits of globalization , such as increased international trade and cooperation and less international aggression. Social globalization —the sharing of ideas and information between countries—has led to innovation in the medical, technological, and environmental preservation industries.

Additionally, globalization has improved the quality of life in several developing nations. This includes implementing efficient transportation systems and ensuring accessibility to services such as education and healthcare.

However, globalization can also have negative effects on society, such as increased income inequality and substandard working conditions in developing countries that produce goods for wealthier nations. Income inequality is directly related to globalization as it further increases the gap between more advanced and developing areas of a nation. As a result, it can also increase the risk of societal violence.

Along with its societal effects, globalization has a lasting impact on the environment—and typically not a positive one.

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What Are the Effects of Globalization on the Environment?

1. Increased Transport of Goods

One of the primary results of globalization is that it opens businesses up to new markets in which they can sell goods and source labor, raw materials, and components.

Both of these realities mean finished products travel farther now than ever before—potentially halfway around the globe. In the past, products were more likely to be produced, sold, and consumed locally. This increased transport of goods can impact the environment in several ways, including:

• Increased emissions: The farther a product travels, the more fuel is consumed, and a greater level of greenhouse gas emissions is produced. According to a report by the International Transport Forum , CO2 emissions from transport will increase 16 percent by 2050. These emissions contribute to pollution, climate change , and ocean acidification around the world and have been shown to significantly impact biodiversity.
• Habitat destruction: Transportation—especially when land-based—requires infrastructure like roads and bridges. The development of such infrastructure can lead to issues including habitat loss and pollution. The more ships that travel by sea, the greater the chances for major oil spills or leaks that damage the delicate marine environment.
• Invasive species: Every shipping container and vessel presents an opportunity for a living organism—from plants to animals to fungus—to hitch a ride to a new location where it can become invasive and grow without checks and balances that might be present in its natural environment.

2. Economic Specialization

One often-overlooked side effect of globalization is that it allows nations and geographical regions to focus on their economic strengths while relying on trading partners for goods they don’t produce themselves. This economic specialization often boosts productivity and efficiency.

Unfortunately, overspecialization can threaten forest health and lead to serious environmental issues, often in the form of habitat loss, deforestation, or natural resource overuse. A few examples include:

• Illegal deforestation in Brazil due to an increase in the country’s cattle ranching operations, which requires significant land for grazing
• Overfishing in coastal areas that include Southeast Asia, which has significantly contributed to reduced fish populations and oceanic pollution
• Overdependence on cash crops, such as coffee, cacao, and various fruits, which has contributed to habitat loss, especially in tropical climates

It’s worth considering that globalization has allowed some nations to specialize in producing various energy commodities, such as oil, natural gas, and timber. Nations that depend on energy sales to fund a large portion of their national budgets, along with those that note “energy security” as a priority, are more likely to take intervening actions in the market in the form of subsidies or laws that make transitioning to renewable energy more difficult.

The main byproduct of these energy sources comes in the form of greenhouse gas emissions, which significantly contribute to global warming and climate change.

3. Decreased Biodiversity

Increased greenhouse gas emissions, ocean acidification, deforestation (and other forms of habitat loss or destruction), climate change, and the introduction of invasive species all work to reduce biodiversity around the globe.

According to the World Wildlife Fund’s recent Living Planet Report , the population sizes of all organisms—including mammals, birds, fish, amphibians, and reptiles—have decreased 68 percent since 1970. Latin America and Africa—two rapidly developing regions important to global trade—have seen disproportionate levels of biodiversity loss, especially among environmentally sensitive fish, reptiles, and amphibians.

While this decrease in biodiversity has many causes, it’s widely believed that the issues listed above have contributed in part.

4. Increased Awareness

While many of globalization’s environmental effects have been negative, its increase has heightened environmental awareness worldwide.

Greater connectivity and higher rates of international travel have made it easier than ever for individuals to see the effects of deforestation, habitat loss, and climate change on the environment. This, in turn, has contributed to new laws, regulations, and processes that limit negative effects.

Globalization as a Threat and an Opportunity

Globalization has allowed society to enjoy many benefits, including increased global cooperation, reduced risk of global conflict, and lower prices for goods and commodities. Unfortunately, it’s also led to serious negative effects on the environment.

Since it isn’t feasible for globalization to end or reverse, it’s likely the situation will worsen until nations, governing bodies, and other organizations are compelled to implement laws and regulations that limit negative effects.

Businesses and industries that operate globally have an incentive to take whatever voluntary actions they can to reduce the potential for negative consequences. Doing so can not only provide an organization greater control over its initiatives, but also a powerful marketing and communication tool .

Some ways businesses address climate change include:

• Transitioning to renewable energy sources
• Choosing greener infrastructures or equipment
• Reducing energy consumption
• Creating credible climate transition plans
• Raising awareness among employees

In addition, investing in renewable energy and packaging, embracing responsible land-use management, and shifting goods production to move closer to the end customer are all viable options that businesses can and should consider. The challenge lies in balancing a desire to embrace corporate social responsibility with the need to turn a profit and run a successful business.

Are you interested in breaking into a global market? Sharpen your knowledge of the international business world with our four-week Global Business course. In addition, explore our Business and Climate Change course to help your organization adapt to and embrace business risks and opportunities created by climate change, as well as our other online courses related to business in society .

This post was updated on February 28, 2024. It was originally published on April 15, 2021.

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World History Project - Origins to the Present

Course: world history project - origins to the present   >   unit 7, read: introduction to globalization.

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• BEFORE YOU WATCH: Global China into the 21st Century
• WATCH: Global China into the 21st Century
• READ: Goods Across the World
• BEFORE YOU WATCH: Globalization I - The Upside
• WATCH: Globalization I - The Upside
• BEFORE YOU WATCH: Nonviolence and Peace Movements
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• READ: Population and Environmental Trends, 1880 to the Present
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• Global Interactions and Institutions

First read: preview and skimming for gist

Second read: key ideas and understanding content.

• What late twentieth-century trends, according to the author, led people to create the term “globalization”?
• What are some historical trends that accelerated globalization before the late twentieth century?
• What are some impacts of globalization in terms of migration and economics?
• What are some positive impacts of globalization, according to the author?
• What are some negative impacts of globalization, according to the author?

Third read: evaluating and corroborating

• What does globalization look like from your perspective? How does it affect your family and community? Do you think it has been a good thing for you? Why or why not?
• Globalization looks very differently studied through each of the three course frames. Pick one of the three course frames and describe the effects of globalization on your home town or neighborhood using only that frame narrative. How would your results have been different if you had chosen a different frame?

Introduction to Globalization

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Trade and Globalization

How did international trade and globalization change over time? What is the structure today? And what is its impact?

By: Esteban Ortiz-Ospina , Diana Beltekian and Max Roser

This page was first published in 2014 and last revised in April 2024.

On this topic page, you can find data, visualizations, and research on historical and current patterns of international trade, as well as discussions of their origins and effects.

Other research and writing on trade and globalization on Our World in Data:

• Is globalization an engine of economic development?
• Is trade a major driver of income inequality?

Related topics

Economic Growth

See all our data, visualizations, and writing on economic growth.

Economic Inequality

See all our data, visualizations, and writing on economic inequality.

See all our data, visualizations, and writing on migration.

See all interactive charts on Trade and Globalization ↓

Trade has changed the world economy

Trade has grown remarkably over the last century.

One of the most important developments of the last century has been the integration of national economies into a global economic system. This process of integration, often called globalization, has resulted in a remarkable growth in trade between countries.

The chart here shows the growth of world exports over more than the last two centuries. These estimates are in constant prices (i.e. have been adjusted to account for inflation) and are indexed at 1913 values.

The chart shows an extraordinary growth in international trade over the last couple of centuries: Exports today are more than 40 times larger than in 1913.

You can switch to a logarithmic scale under ‘Settings’. This will help you see that, over the long run, growth has roughly followed an exponential path.

The increase in trade has even outpaced economic growth

The chart above shows how much more trade we have today relative to a century ago. But what about trade relative to total economic output?

Over the last couple of centuries the world economy has experienced sustained positive economic growth , so looking at changes in trade relative to GDP offers another interesting perspective.

The next chart plots the value of traded goods relative to GDP (i.e. the value of merchandise trade as a share of global economic output).

Up to 1870, the sum of worldwide exports accounted for less than 10% of global output. Today, the value of exported goods around the world is around 25%. This shows that over the last hundred years, the growth in trade has even outpaced rapid economic growth.

Trade expanded in two waves

The first "wave of globalization" started in the 19th century, the second one after ww2.

The following visualization presents a compilation of available trade estimates, showing the evolution of world exports and imports as a share of global economic output .

This metric (the ratio of total trade, exports plus imports, to global GDP) is known as the “openness index”. The higher the index, the higher the influence of trade transactions on global economic activity. 1

As we can see, until 1800 there was a long period characterized by persistently low international trade – globally the index never exceeded 10% before 1800. This then changed over the course of the 19th century, when technological advances triggered a period of marked growth in world trade – the so-called “first wave of globalization”.

This first wave came to an end with the beginning of World War I, when the decline of liberalism and the rise of nationalism led to a slump in international trade. In the chart we see a large drop in the interwar period.

After World War II trade started growing again. This new – and ongoing – wave of globalization has seen international trade grow faster than ever before. Today the sum of exports and imports across nations amounts to more than 50% of the value of total global output. 2

Before the first wave of globalization, trade was driven mostly by colonialism

Over the early modern period, transoceanic flows of goods between empires and colonies accounted for an important part of international trade. The following visualizations provide a comparison of intercontinental trade, in per capita terms, for different countries.

As we can see, intercontinental trade was very dynamic, with volumes varying considerably across time and from empire to empire.

Leonor Freire Costa, Nuno Palma, and Jaime Reis, who compiled and published the original data shown here, argue that trade, also in this period, had a substantial positive impact on the economy. 3

The first wave of globalization was marked by the rise and collapse of intra-European trade

The following visualization shows a detailed overview of Western European exports by destination. Figures correspond to export-to-GDP ratios (i.e. the sum of the value of exports from all Western European countries, divided by the total GDP in this region). You can use “Settings” to switch to a relative view and see the proportional contribution of each region to total Western European exports.

This chart shows that growth in Western European trade throughout the 19th century was largely driven by trade within the region: In the period 1830-1900 intra-European exports went from 1% of GDP to 10% of GDP, and this meant that the relative weight of intra-European exports doubled over the period. However, this process of European integration then collapsed sharply in the interwar period.

After the Second World War trade within Europe rebounded, and from the 1990s onwards exceeded the highest levels of the first wave of globalization. In addition, Western Europe then started to increasingly trade with Asia, the Americas, and to a smaller extent Africa and Oceania.

The next graph, using data from Broadberry and O'Rourke (2010) 4 , shows another perspective on the integration of the global economy and plots the evolution of three indicators measuring integration across different markets – specifically goods, labor, and capital markets.

The indicators in this chart are indexed, so they show changes relative to the levels of integration observed in 1900. This gives us another perspective on how quickly global integration collapsed with the two World Wars. 5

The second wave of globalization was enabled by technology

The worldwide expansion of trade after the Second World War was largely possible because of reductions in transaction costs stemming from technological advances, such as the development of commercial civil aviation, the improvement of productivity in the merchant marines, and the democratization of the telephone as the main mode of communication. The visualization shows how, at the global level, costs across these three variables have been going down since 1930.

Reductions in transaction costs impacted not only the volumes of trade but also the types of exchanges that were possible and profitable.

The first wave of globalization was characterized by inter-industry trade. This means that countries exported goods that were very different from what they imported – England exchanged machines for Australian wool and Indian tea. As transaction costs went down, this changed. In the second wave of globalization, we are seeing a rise in intra -industry trade (i.e. the exchange of broadly similar goods and services is becoming more and more common). France, for example, now both imports and exports machines to and from Germany.

The following visualization, from the UN World Development Report (2009) , plots the fraction of total world trade that is accounted for by intra-industry trade, by type of goods. As we can see, intra-industry trade has been going up for primary, intermediate, and final goods.

This pattern of trade is important because the scope for specialization increases if countries are able to exchange intermediate goods (e.g. auto parts) for related final goods (e.g. cars).

Trade and trade partners by country

Above, we examined the broad global trends over the last two centuries. Let's now examine country-level trends over this long and dynamic period.

This chart plots estimates of the value of trade in goods, relative to total economic activity (i.e. export-to-GDP ratios).

These historical estimates obviously come with a large margin of error (in the measurement section below we discuss the data limitations); yet they offer an interesting perspective.

You can edit the countries and regions selected. Each country tells a different story. 7

In the next chart we plot, country by country, the regional breakdown of exports. India is shown by default, but you can edit the countries and regions shown.

When switching to displaying relative values under ‘Settings’, we see the proportional contribution of purchases from each region. For example, we see that more than a third of Indian exports went to Asian countries in recent decades.

This gives us an interesting perspective on the changing nature of trade partnerships. In India, we see the rising importance of trade with Africa—a pattern that we discuss in more detail below .

Trade around the world today

How much do countries trade, trade openness around the world.

The metric trade as a share of GDP gives us an idea of global integration by capturing all incoming and outgoing transactions of a country.

The charts shows that countries differ a lot in the extent to which they engage in trade. Trade, for example, is much less important to the US economy than for other rich countries.

If you press the play button on the map, you can see changes over time. This reveals that, despite the great variation between countries, there is a common trend: over the last couple of decades trade openness has gone up in most countries.

Exports and imports in real dollars

Expressing the value of trade as a share of GDP tells us the importance of trade in relation to the size of economic activity. Let's now take a look at trade in monetary terms – this tells us the importance of trade in absolute, rather than relative terms.

The chart shows the value of exports (goods plus services) in dollars, country by country.

The main takeaway here is that the trend towards more trade is more pronounced than in the charts showing shares of GDP. This is not surprising: most countries today produce more than a couple of decades ago , and at the same time they trade more of what they produce. 8

What do countries trade?

Trade in goods vs. trade in services.

Trade transactions include goods (tangible products that are physically shipped across borders by road, rail, water, or air) and services (intangible commodities, such as tourism, financial services, and legal advice).

Many traded services make merchandise trade easier or cheaper—for example, shipping services, or insurance and financial services.

Trade in goods has been happening for millennia , while trade in services is a relatively recent phenomenon.

In some countries services are today an important driver of trade: in the UK services account for around half of all exports; and in the Bahamas, almost all exports are services.

In other countries, such as Nigeria and Venezuela, services account for a small share of total exports.

Globally, trade in goods accounts for the majority of trade transactions. But as this chart shows, the share of services in total global exports has slightly increased in recent decades. 9

How are trade partnerships changing?

Bilateral trade is becoming increasingly common.

If we consider all pairs of countries that engage in trade around the world, we find that in the majority of cases, there is a bilateral relationship today: most countries that export goods to a country also import goods from the same country.

The interactive visualization shows this. 10 In the chart, all possible country pairs are partitioned into three categories: the top portion represents the fraction of country pairs that do not trade with one another; the middle portion represents those that trade in both directions (they export to one another); and the bottom portion represents those that trade in one direction only (one country imports from, but does not export to, the other country).

As we can see, bilateral trade is becoming increasingly common (the middle portion has grown substantially). However, many countries still do not trade with each other at all.

South-South trade is becoming increasingly important

The next visualization here shows the share of world merchandise trade that corresponds to exchanges between today's rich countries and the rest of the world.

The 'rich countries' in this chart are: Australia, Austria, Belgium, Canada, Cyprus, Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Israel, Italy, Japan, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, United Kingdom and the United States. 'Non-rich countries' are all the other countries in the world.

As we can see, up until the Second World War, the majority of trade transactions involved exchanges between this small group of rich countries. But this has changed quickly over the last couple of decades, and today, trade between non-rich countries is just as important as trade between rich countries.

In the past two decades, China has been a key driver of this dynamic: the UN Human Development Report (2013) estimates that between 1992 and 2011, China's trade with Sub-Saharan Africa rose from $1 billion to more than $140 billion. 11

The majority of preferential trade agreements are between emerging economies

The last few decades have not only seen an increase in the volume of international trade, but also an increase in the number of preferential trade agreements through which exchanges take place. A preferential trade agreement is a trade pact that reduces tariffs between the participating countries for certain products.

The visualization here shows the evolution of the cumulative number of preferential trade agreements in force worldwide, according to the World Trade Organization (WTO). These numbers include notified and non-notified preferential agreements (the source reports that only about two-thirds of the agreements currently in force have been notified to the WTO) and are disaggregated by country groups.

This figure shows the increasingly important role of trade between developing countries (South-South trade), vis-a-vis trade between developed and developing countries (North-South trade). In the late 1970s, North-South agreements accounted for more than half of all agreements – in 2010, they accounted for about one-quarter. Today, the majority of preferential trade agreements are between developing economies.

Trading patterns have been changing quickly in middle-income countries

An important change in the composition of exported goods in these countries has accompanied the increase in trade among emerging economies over the last half century.

The next visualization plots the share of food exports in each country's total exported merchandise. These figures, produced by the World Bank, correspond to the Standard International Trade Classification, in which 'food' includes, among other goods, live animals, beverages, tobacco, coffee, oils, and fats.

Two points stand out. First, the relative importance of food exports has substantially decreased in most countries since the 1960s (although globally, it has gone up slightly more recently). Second, this decrease has been largest in middle-income countries, particularly in Latin America.

Regarding levels, as one would expect, in high-income countries, food still accounts for a much smaller share of merchandise exports than in most low- and middle-income-countries.

Trade generates efficiency gains

The raw correlation between trade and growth.

Over the last couple of centuries, the world economy has experienced sustained positive economic growth , and over the same period, this process of economic growth has been accompanied by even faster growth in global trade .

In a similar way, if we look at country-level data from the last half century we find that there is also a correlation between economic growth and trade: countries with higher rates of GDP growth also tend to have higher rates of growth in trade as a share of output. This basic correlation is shown in the chart here, where we plot the average annual change in real GDP per capita, against growth in trade (average annual change in value of exports as a share of GDP). 12

Is this statistical association between economic output and trade causal?

Among the potential growth-enhancing factors that may come from greater global economic integration are: competition (firms that fail to adopt new technologies and cut costs are more likely to fail and be replaced by more dynamic firms); economies of scale (firms that can export to the world face larger demand, and under the right conditions, they can operate at larger scales where the price per unit of product is lower); learning and innovation (firms that trade gain more experience and exposure to develop and adopt technologies and industry standards from foreign competitors). 13

Are these mechanisms supported by the data? Let's take a look at the available empirical evidence.

Evidence from cross-country differences in trade, growth, and productivity

When it comes to academic studies estimating the impact of trade on GDP growth, the most cited paper is Frankel and Romer (1999). 14

In this study, Frankel and Romer used geography as a proxy for trade to estimate the impact of trade on growth. This is a classic example of the so-called instrumental variables approach . The idea is that a country's geography is fixed, and mainly affects national income through trade. So if we observe that a country's distance from other countries is a powerful predictor of economic growth (after accounting for other characteristics), then the conclusion is drawn that it must be because trade has an effect on economic growth. Following this logic, Frankel and Romer find evidence of a strong impact of trade on economic growth.

Other papers have applied the same approach to richer cross-country data, and they have found similar results. A key example is Alcalá and Ciccone (2004). 15

This body of evidence suggests trade is indeed one of the factors driving national average incomes (GDP per capita) and macroeconomic productivity (GDP per worker) over the long run. 16

Evidence from changes in labor productivity at the firm level

If trade is causally linked to economic growth, we would expect that trade liberalization episodes also lead to firms becoming more productive in the medium and even short run. There is evidence suggesting this is often the case.

Pavcnik (2002) examined the effects of liberalized trade on plant productivity in the case of Chile, during the late 1970s and early 1980s. She found a positive impact on firm productivity in the import-competing sector. She also found evidence of aggregate productivity improvements from the reshuffling of resources and output from less to more efficient producers. 17

Bloom, Draca, and Van Reenen (2016) examined the impact of rising Chinese import competition on European firms over the period 1996-2007 and obtained similar results. They found that innovation increased more in those firms most affected by Chinese imports. They also found evidence of efficiency gains through two related channels: innovation increased and new existing technologies were adopted within firms, and aggregate productivity also increased because employment was reallocated towards more technologically advanced firms. 18

Trade does not only increase efficiency gains

Overall, the available evidence suggests that trade liberalization does improve economic efficiency. This evidence comes from different political and economic contexts and includes both micro and macro measures of efficiency.

This result is important because it shows that there are gains from trade. But of course, efficiency is not the only relevant consideration here. As we discuss in a companion article , the efficiency gains from trade are not generally equally shared by everyone. The evidence from the impact of trade on firm productivity confirms this: "reshuffling workers from less to more efficient producers" means closing down some jobs in some places. Because distributional concerns are real it is important to promote public policies – such as unemployment benefits and other safety-net programs – that help redistribute the gains from trade.

Trade has distributional consequences

The conceptual link between trade and household welfare.

When a country opens up to trade, the demand and supply of goods and services in the economy shift. As a consequence, local markets respond, and prices change. This has an impact on households, both as consumers and as wage earners.

The implication is that trade has an impact on everyone. It's not the case that the effects are restricted to workers from industries in the trade sector; or to consumers who buy imported goods. The effects of trade extend to everyone because markets are interlinked, so imports and exports have knock-on effects on all prices in the economy, including those in non-traded sectors.

Economists usually distinguish between "general equilibrium consumption effects" (i.e. changes in consumption that arise from the fact that trade affects the prices of non-traded goods relative to traded goods) and "general equilibrium income effects" (i.e. changes in wages that arise from the fact that trade has an impact on the demand for specific types of workers, who could be employed in both the traded and non-traded sectors).

Considering all these complex interrelations, it's not surprising that economic theories predict that not everyone will benefit from international trade in the same way. The distribution of the gains from trade depends on what different groups of people consume, and which types of jobs they have, or could have. 19

The link between trade, jobs and wages

Evidence from chinese imports and their impact on factory workers in the us.

The most famous study looking at this question is Autor, Dorn and Hanson (2013): "The China syndrome: Local labor market effects of import competition in the United States". 20

In this paper, Autor and coauthors examined how local labor markets changed in the parts of the country most exposed to Chinese competition. They found that rising exposure increased unemployment, lowered labor force participation, and reduced wages. Additionally, they found that claims for unemployment and healthcare benefits also increased in more trade-exposed labor markets.

The visualization here is one of the key charts from their paper. It's a scatter plot of cross-regional exposure to rising imports, against changes in employment. Each dot is a small region (a 'commuting zone' to be precise). The vertical position of the dots represents the percent change in manufacturing employment for the working-age population, and the horizontal position represents the predicted exposure to rising imports (exposure varies across regions depending on the local weight of different industries).

The trend line in this chart shows a negative relationship: more exposure goes along with less employment. There are large deviations from the trend (there are some low-exposure regions with big negative changes in employment); but the paper provides more sophisticated regressions and robustness checks, and finds that this relationship is statistically significant.

This result is important because it shows that the labor market adjustments were large. Many workers and communities were affected over a long period of time. 21

But it's also important to keep in mind that Autor and colleagues are only giving us a partial perspective on the total effect of trade on employment. In particular, comparing changes in employment at the regional level misses the fact that firms operate in multiple regions and industries at the same time. Indeed, Ildikó Magyari found evidence suggesting the Chinese trade shock provided incentives for US firms to diversify and reorganize production. 22

So companies that outsourced jobs to China often ended up closing some lines of business, but at the same time expanded other lines elsewhere in the US. This means that job losses in some regions subsidized new jobs in other parts of the country.

On the whole, Magyari finds that although Chinese imports may have reduced employment within some establishments, these losses were more than offset by gains in employment within the same firms in other places. This is no consolation to people who lost their jobs. But it is necessary to add this perspective to the simplistic story of "trade with China is bad for US workers".

Evidence from the expansion of trade in India and the impact on poverty reductions

Another important paper in this field is Topalova (2010): "Factor immobility and regional impacts of trade liberalization: Evidence on poverty from India". 23

In this paper, Topalova examines the impact of trade liberalization on poverty across different regions in India, using the sudden and extensive change in India's trade policy in 1991. She finds that rural regions that were more exposed to liberalization experienced a slower decline in poverty and lower consumption growth.

Analyzing the mechanisms underlying this effect, Topalova finds that liberalization had a stronger negative impact among the least geographically mobile at the bottom of the income distribution and in places where labor laws deterred workers from reallocating across sectors.

The evidence from India shows that (i) discussions that only look at "winners" in poor countries and "losers" in rich countries miss the point that the gains from trade are unequally distributed within both sets of countries; and (ii) context-specific factors, like worker mobility across sectors and geographic regions, are crucial to understand the impact of trade on incomes.

Evidence from other studies

• Donaldson (2018) uses archival data from colonial India to estimate the impact of India’s vast railroad network. He finds railroads increased trade, and in doing so they increased real incomes (and reduced income volatility). 24
• Porto (2006) looks at the distributional effects of Mercosur on Argentine families, and finds this regional trade agreement led to benefits across the entire income distribution. He finds the effect was progressive: poor households gained more than middle-income households because prior to the reform, trade protection benefitted the rich disproportionately. 25
• Trefler (2004) looks at the Canada-US Free Trade Agreement and finds there was a group who bore "adjustment costs" (displaced workers and struggling plants) and a group who enjoyed "long-run gains" (consumers and efficient plants). 26

The link between trade and the cost of living

The fact that trade negatively affects labor market opportunities for specific groups of people does not necessarily imply that trade has a negative aggregate effect on household welfare. This is because, while trade affects wages and employment, it also affects the prices of consumption goods. So households are affected both as consumers and as wage earners.

Most studies focus on the earnings channel and try to approximate the impact of trade on welfare by looking at how much wages can buy, using as a reference the changing prices of a fixed basket of goods.

This approach is problematic because it fails to consider welfare gains from increased product variety, and obscures complicated distributional issues such as the fact that poor and rich individuals consume different baskets so they benefit differently from changes in relative prices. 27

Ideally, studies looking at the impact of trade on household welfare should rely on fine-grained data on prices, consumption, and earnings. This is the approach followed in Atkin, Faber, and Gonzalez-Navarro (2018): "Retail globalization and household welfare: Evidence from Mexico". 28

Atkin and coauthors use a uniquely rich dataset from Mexico, and find that the arrival of global retail chains led to reductions in the incomes of traditional retail sector workers, but had little impact on average municipality-level incomes or employment; and led to lower costs of living for both rich and poor households.

The chart here shows the estimated distribution of total welfare gains across the household income distribution (the light-gray lines correspond to confidence intervals). These are proportional gains expressed as a percent of initial household income.

As we can see, there is a net positive welfare effect across all income groups; but these improvements in welfare are regressive, in the sense that richer households gain proportionally more (about 7.5 percent gain compared to 5 percent). 29

Evidence from other countries confirms this is not an isolated case – the expenditure channel really seems to be an important and understudied source of household welfare. Giuseppe Berlingieri, Holger Breinlich, Swati Dhingra, for example, investigated the consumer benefits from trade agreements implemented by the EU between 1993 and 2013; and they found that these trade agreements increased the quality of available products, which translated into a cumulative reduction in consumer prices equivalent to savings of €24 billion per year for EU consumers. 30

Implications of trade’s distributional effects

The available evidence shows that, for some groups of people, trade has a negative effect on wages and employment opportunities; at the same time, it has a large positive effect via lower consumer prices and increased product availability.

Two points are worth emphasizing.

For some households, the net effect is positive. But for some households that's not the case. In particular, workers who lose their jobs can be affected for extended periods of time, so the positive effect via lower prices is not enough to compensate them for the reduction in earnings.

On the whole, if we aggregate changes in welfare across households, the net effect is usually positive. But this is hardly a consolation for the worse off.

This highlights a complex reality: There are aggregate gains from trade , but there are also real distributional concerns. Even if trade is not a major driver of income inequalities , it's important to keep in mind that public policies, such as unemployment benefits and other safety-net programs, can and should help redistribute the gains from trade.

Explaining trade patterns: Theory and Evidence

Comparative advantage, theory: what is 'comparative advantage' and why does it matter to understand trade.

In economic theory, the 'economic cost' – or the 'opportunity cost' – of producing a good is the value of everything you need to give up in order to produce that good.

Economic costs include physical inputs (the value of the stuff you use to produce the good), plus forgone opportunities (when you allocate scarce resources to a task, you give up alternative uses of those resources).

A country or a person is said to have a 'comparative advantage' if it can produce something at a lower opportunity cost than its trade partners.

The forgone opportunities of production are key to understanding this concept. It is precisely this that distinguishes absolute advantage from comparative advantage.

To see the difference between comparative and absolute advantage, consider a commercial aviation pilot and a baker. Suppose the pilot is an excellent chef, and she can bake just as well, or even better than the baker. In this case, the pilot has an absolute advantage in both tasks. Yet the baker probably has a comparative advantage in baking, because the opportunity cost of baking is much higher for the pilot.

The freely available economics textbook The Economy: Economics for a Changing World explains this as follows: "A person or country has comparative advantage in the production of a particular good, if the cost of producing an additional unit of that good relative to the cost of producing another good is lower than another person or country’s cost to produce the same two goods."

At the individual level, comparative advantage explains why you might want to delegate tasks to someone else, even if you can do those tasks better and faster than them. This may sound counterintuitive, but it is not: If you are good at many things, it means that investing time in one task has a high opportunity cost, because you are not doing the other amazing things you could be doing with your time and resources. So, at least from an efficiency point of view, you should specialize on what you are best at, and delegate the rest.

The same logic applies to countries. Broadly speaking, the principle of comparative advantage postulates that all nations can gain from trade if each specializes in producing what they are relatively more efficient at producing, and imports the rest: “do what you do best, import the rest”. 31

In countries with a relative abundance of certain factors of production, the theory of comparative advantage predicts that they will export goods that rely heavily upon those factors: a country typically has a comparative advantage in those goods that use its abundant resources. Colombia exports bananas to Europe because it has comparatively abundant tropical weather.

Is there empirical support for comparative-advantage theories of trade?

The empirical evidence suggests that the principle of comparative advantage does help explain trade patterns. Bernhofen and Brown (2004) 32 , for instance, provide evidence using the experience of Japan. Specifically, they exploit Japan’s dramatic nineteenth-century move from a state of near complete isolation to wide trade openness.

The graph here shows the price changes of the key tradable goods after the opening up to trade. It presents a scatter diagram of the net exports in 1869 graphed in relation to the change in prices from 1851–53 to 1869. As we can see, this is consistent with the theory: after opening to trade, the relative prices of major exports such as silk increased (Japan exported what was cheap for them to produce and which was valuable abroad), while the relative price of imports such as sugar declined (they imported what was relatively more difficult for them to produce, but was cheap abroad).

Trade diminishes with distance

The resistance that geography imposes on trade has long been studied in the empirical economics literature – and the main conclusion is that trade intensity is strongly linked to geographic distance.

The visualization, from Eaton and Kortum (2002), graphs 'normalized import shares' against distance. 33 Each dot represents a country pair from a set of 19 OECD countries, and both the vertical and horizontal axes are expressed on logarithmic scales.

The 'normalized import shares' in the vertical axis provide a measure of how much each country imports from different partners (see the paper for details on how this is calculated and normalized), while the distance in the horizontal axis corresponds to the distance between central cities in each country (see the paper and references therein for details on the list of cities). As we can see, there is a strong negative relationship. Trade diminishes with distance. Through econometric modeling, the paper shows that this relationship is not just a correlation driven by other factors: their findings suggest that distance imposes a significant barrier to trade.

The fact that trade diminishes with distance is also corroborated by data on trade intensity within countries. The visualization here shows, through a series of maps, the geographic distribution of French firms that export to France's neighboring countries. The colors reflect the percentage of firms that export to each specific country.

As we can see, the share of firms exporting to each of the corresponding neighbors is the largest close to the border. The authors also show in the paper that this pattern holds for the value of individual-firm exports – trade value decreases with distance to the border.

Institutions

Conducting international trade requires both financial and non-financial institutions to support transactions. Some of these institutions are fairly obvious (e.g. law enforcement); but some are less obvious. For example, the evidence shows that producers in exporting countries often need credit in order to engage in trade.

The scatter plot, from Manova (2013), shows the correlation between levels in private credit (specifically exporters’ private credit as a share of GDP) and exports (average log bilateral exports across destinations and sectors). 35 As can be seen, financially developed economies – those with more dynamic private credit markets – typically outperform exporters with less evolved financial institutions.

Other studies have shown that country-specific institutions, like the knowledge of foreign languages, for instance, are also important to promote foreign relative to domestic trade. 36

Increasing returns to scale

The concept of comparative advantage predicts that if all countries had identical endowments and institutions, there would be little incentive for specialization because the opportunity cost of producing any good would be the same in every country.

So you may wonder: why is it then the case that in the last few years, we have seen such rapid growth in intra-industry trade between rich countries?

The increase in intra-industry between rich countries seems paradoxical under the light of comparative advantage because in recent decades we have seen convergence in key factors, such as human capital , across these countries.

The solution to the paradox is actually not very complicated: Comparative advantage is one, but not the only force driving incentives to specialization and trade.

Several economists, most notably Paul Krugman, have developed theories of trade in which trade is not due to differences between countries, but instead due to "increasing returns to scale" – an economic term used to denote a technology in which producing extra units of a good becomes cheaper if you operate at a larger scale.

The idea is that specialization allows countries to reap greater economies of scale (i.e. to reduce production costs by focusing on producing large quantities of specific products), so trade can be a good idea even if the countries do not differ in endowments, including culture and institutions.

These models of trade, often referred to as “New Trade Theory”, are helpful in explaining why in the last few years we have seen such rapid growth in two-way exchanges of goods within industries between developed nations.

In a much-cited paper, Evenett and Keller (2002) show that both factor endowments and increasing returns help explain production and trade patterns around the world. 37

You can learn more about New Trade Theory, and the empirical support behind it, in Paul Krugman's Nobel lecture .

Measurement and data quality

There are dozens of official sources of data on international trade, and if you compare these different sources, you will find that they do not agree with one another. Even if you focus on what seems to be the same indicator for the same year in the same country, discrepancies are large.

Such differences between sources can also be found in rich countries where statistical agencies tend to follow international reporting guidelines more closely.

There are also large bilateral discrepancies within sources: the value of goods that country A exports to country B can be more than the value of goods that country B imports from country A.

Here we explain how international trade data is collected and processed, and why there are such large discrepancies.

What data is available?

The data hubs from several large international organizations publish and maintain extensive cross-country datasets on international trade. Here's a list of the most important ones:

• World Bank Open Data
• WTO Statistics
• UN Comtrade
• UNCTAD World Integrated Trade Solutions

In addition to these sources, there are also many other academic projects that publish data on international trade. These projects tend to rely on data from one or more of the sources above, and they typically process and merge series in order to improve coverage and consistency. Three important sources are:

• The Correlates of War Project . 38
• The NBER-United Nations Trade Dataset Project .
• The CEPII Bilateral Trade and Gravity Data Project . 39

How large are the discrepancies between sources?

In the visualization here, we compare the data published by several of the sources listed above, country by country, from 1955 to today.

For each country, we exclude trade in services, and we focus only on estimates of the total value of exported goods, expressed as shares of GDP. 40

As this chart clearly shows, different data sources often tell very different stories. If you change the country or region shown you will see that this is true, to varying degrees, across all countries and years.

Constructing this chart was demanding. It required downloading trade data from many different sources, collecting the relevant series, and then standardizing them so that the units of measure and the geographical territories were consistent.

All series, except the two long-run series from CEPII and NBER-UN, were produced from data published by the sources in current US dollars and then converted to GDP shares using a unique source (World Bank).

So, if all series are in the same units (share of national GDP) and they measure the same thing (value of goods exported from one country to the rest of the world), what explains the differences?

Let's dig deeper to understand what's going on.

Why doesn't the data add up?

Differences in guidelines used by countries to record and report trade data.

Broadly speaking, there are two main approaches used to estimate international merchandise trade:

• The first approach relies on estimating trade from customs records , often complementing or correcting figures with data from enterprise surveys and administrative records associated with taxation. The main manual providing guidelines for this approach is the International Merchandise Trade Statistics Manual (IMTS).
• The second approach relies on estimating trade from macroeconomic data , typically National Accounts . The main manual providing guidelines for this approach is the Balance of Payments and International Investment Position Manual (BPM6), which was drafted in parallel with the 2008 System of National Accounts of the United Nations (SNA 2008). The idea behind this approach is to record changes in economic ownership. 41

Under these two approaches, it is common to distinguish between 'traded merchandise' and 'traded goods'. The distinction is often made because goods simply being transported through a country (i.e., goods in transit) are not considered to change a country's stock of material resources and are hence often excluded from the more narrow concept of 'merchandise trade'.

Also, adding to the complexity, countries often rely on measurement protocols developed alongside approaches and concepts that are not perfectly compatible to begin with. In Europe, for example, countries use the 'Compilers guide on European statistics on international trade in goods'.

Measurement error and other inconsistencies

Even when two sources rely on the same broad accounting approach, discrepancies arise because countries fail to adhere perfectly to the protocols.

In theory, for example, the exports of country A to country B should mirror the imports of country B from country A. But in practice this is rarely the case because of differences in valuation. According to the BPM6, imports, and exports should be recorded in the balance of payments accounts on a ' free on board (FOB) basis', which means using prices that include all charges up to placing the goods on board a ship at the port of departure. Yet many countries stick to FOB values only for exports, and use CIF values for imports (CIF stands for 'Cost, Insurance and Freight', and includes the costs of transportation). 42

The chart here gives you an idea of how large import-export asymmetries are. Shown are the differences between the value of goods that each country reports exporting to the US, and the value of goods that the US reports importing from the same countries. For example, for China, the figure in the chart corresponds to the “Value of merchandise imports in the US from China” minus the “Value of merchandise exports from China to the US”.

The differences in the chart here, which are both positive and negative, suggest that there is more going on than differences in FOB vs. CIF values. If all asymmetries were coming from FOB-CIF differences, then we should only see positive values in the chart (recall that, unlike FOB values, CIF values include the cost of transportation, so CIF values are larger).

What else may be going on here?

Another common source of measurement error relates to the inconsistent attribution of trade partners. An example is failure to follow the guidelines on how to treat goods passing through intermediary countries for processing or merchanting purposes. As global production chains become more complex, countries find it increasingly difficult to unambiguously establish the origin and final destination of merchandise, even when rules are established in the manuals. 43

And there are still more potential sources of discrepancies. For example differences in customs and tax regimes, and differences between "general" and "special" trade systems (i.e. differences between statistical territories and actual country borders, which do not often coincide because of things like 'custom free zones'). 44

Even when two sources have identical trade estimates, inconsistencies in published data can arise from differences in exchange rates. If a dataset reports cross-country trade data in US dollars, estimates will vary depending on the exchange rates used. Different exchange rates will lead to conflicting estimates, even if figures in local currency units are consistent.

A checklist for comparing sources

Asymmetries in international trade statistics are large and arise for a variety of reasons. These include conceptual inconsistencies across measurement standards and inconsistencies in the way countries apply agreed-upon protocols. Here's a checklist of issues to keep in mind when comparing sources.

• Differences in underlying records: is trade measured from National Accounts data rather than directly from custom or tax records?
• Differences in import and export valuations: are transactions valued at FOB or CIF prices?
• Inconsistent attribution of trade partners: how is the origin and final destination of merchandise established?
• Difference between 'goods' and 'merchandise': how are re-importing, re-exporting, and intermediary merchanting transactions recorded?
• Exchange rates: how are values converted from local currency units to the currency that allows international comparisons (most often the US-$)?
• Differences between 'general' and 'special' trade system: how is trade recorded for custom-free zones?
• Other issues: Time of recording, confidentiality policies, product classification, deliberate mis-invoicing for illicit purposes.

Many organizations producing trade data have long recognized these factors. Indeed, international organizations often incorporate corrections in an attempt to improve data quality.

The OECD's Balanced International Merchandise Trade Statistics , for example, uses its own approach to correct and reconcile international merchandise trade statistics. 45

The corrections applied in the OECD's 'balanced' series make this the best source for cross-country comparisons. However, this dataset has low coverage across countries, and it only goes back to 2011. This is an important obstacle since the complex adjustments introduced by the OECD imply we can't easily improve coverage by appending data from other sources. At Our World in Data we have chosen to rely on CEPII as the main source for exploring long-run changes in international trade, but we also rely on World Bank and OECD data for up-to-date cross-country comparisons.

There are two key lessons from all of this. The first lesson is that, for most users of trade data out there, there is no obvious way of choosing between sources. And the second lesson is that, because of statistical glitches, researchers and policymakers should always take analyses of trade data with a pinch of salt. For example, in a recent high-profile report , researchers attributed mismatches in bilateral trade data to illicit financial flows through trade mis-invoicing (or trade-based money laundering). As we show here, this interpretation of the data is not appropriate, since mismatches in the data can, and often do arise from measurement inconsistencies rather than malfeasance. 46

Hopefully, the discussion and checklist above can help researchers better interpret and choose between conflicting data sources.

Interactive charts on Trade and Globalization

The openness index, when calculated for the world as a whole, includes double-counting of transactions: When country A sells goods to country B, this shows up in the data both as an import (B imports from A) and as an export (A sells to B).

Indeed, if you compare the chart showing the global trade openness index and the chart showing global merchandise exports as a share of GDP , you find that the former is almost twice as large as the latter.

Why is the global openness index not exactly twice the value reported in the chart plotting global merchandise exports? There a three reasons.

First, the global openness index uses different sources. Second, the global openness index includes trade in goods and services, while merchandise exports include goods but not services. And third, the amount that country A reports exporting to country B does not usually match the amount that B reports importing from A.

We explore this in more detail in our measurement section below .

Klasing and Milionis (2014), one of the sources in the chart, published an additional set of estimates under an alternative specification. Similarly, for the period 1960-2015, the World Bank's World Development Indicators published an alternative set of estimates similar but not identical to those included from the Penn World Tables (9.1). You find all these alternative overlapping sources in this comparison chart .

Leonor Freire Costa, Nuno Palma, and Jaime Reis (2015) – The great escape? The contribution of the empire to Portugal's economic growth, 1500–1800 Leonor Freire Costa Nuno Palma Jaime Reis European Review of Economic History, Volume 19, Issue 1, 1 February 2015, Pages 1–22, https://doi.org/10.1093/ereh/heu019

Broadberry and O'Rourke (2010) - The Cambridge Economic History of Modern Europe: Volume 2, 1870 to the Present. Cambridge University Press.

Integration in the goods markets is measured here through the 'trade openness index', which is defined by the sum of exports and imports as a share of GDP. In our interactive chart you can explore trends in trade openness over this period for a selection of European countries.

Broadberry and O'Rourke (2010) - The Cambridge Economic History of Modern Europe: Volume 2, 1870 to the Present. Cambridge University Press. The graph depicts the “evolution of three indicators measuring integration in commodity, labor, and capital markets over the long run. Commodity market integration is measured by computing the ratio of exports to GDP. Labor market integration is measured by dividing the migratory turnover by population. Financial integration is measured using Feldstein–Horioka estimators of current account disconnectedness.”

We also have the same chart but showing imports .

We also have the same chart, but showing imports .

This interactive chart shows trade in services as a share of GDP across countries and regions.

This chart was inspired by a chart from Helpman, E., Melitz, M., & Rubinstein, Y. (2007). Estimating trade flows: Trading partners and trading volumes (No. w12927). National Bureau of Economic Research.

We also have the same data, but as a stacked-area chart .

There are different ways of capturing this correlation. I focus here on all countries with data over the period 1945-2014. You can find a similar chart using different data sources and time periods in Ventura, J. (2005). A global view of economic growth. Handbook of economic growth, 1, 1419-1497. Online here .

The textbook The Economy: Economics for a Changing World explains this in more detail.

Frankel, J. A., & Romer, D. H. (1999). Does trade cause growth? American Economic Review, 89(3), 379-399.

Alcalá, F., & Ciccone, A. (2004). Trade and productivity . The Quarterly Journal of Economics, 119(2), 613-646.

There are many papers that try to answer this specific question with macro data. For an overview of papers and methods see: Durlauf, S. N., Johnson, P. A., & Temple, J. R. (2005). Growth econometrics. Handbook of economic growth, 1, 555-677.

Pavcnik, N. (2002). Trade liberalization, exit, and productivity improvements: Evidence from Chilean plants . The Review of Economic Studies, 69(1), 245-276.

Bloom, N., Draca, M., & Van Reenen, J. (2016). Trade induced technical change? The impact of Chinese imports on innovation, IT and productivity. The Review of Economic Studies, 83(1), 87-117. Available online here .

You can read more about these economic concepts, and the related predictions from economic theory, in Chapter 18 of the textbook The Economy: Economics for a Changing World .

David, H., Dorn, D., & Hanson, G. H. (2013). The China syndrome: Local labor market effects of import competition in the United States . American Economic Review, 103(6), 2121-68.

It's important to mention here that the economist Jonathan Rothwell wrote a paper suggesting these findings are the result of a statistical illusion. Rothwell's critique received some attention from the media , but Autor and coauthors provided a reply , which I think successfully refutes this claim.

Magyari, I. (2017). Firm Reorganization, Chinese Imports, and US Manufacturing Employment . US Census Bureau, Center for Economic Studies.

Topalova, P. (2010). Factor immobility and regional impacts of trade liberalization: Evidence on poverty from India . American Economic Journal: Applied Economics, 2(4), 1-41.

Donaldson, D. (2018). Railroads of the Raj: Estimating the impact of transportation infrastructure . American Economic Review, 108(4-5), 899-934.

Porto, G (2006). Using Survey Data to Assess the Distributional Effects of Trade Policy. Journal of International Economics 70 (2006) 140–160.

Trefler, D. (2004). The long and short of the Canada-US free trade agreement . American Economic Review, 94(4), 870-895.

See: (i) Feenstra, R. C., & Weinstein, D. E. (2017). Globalization, markups, and US welfare . Journal of Political Economy, 125(4), 1040-1074. (ii) Fajgelbaum, P. D., & Khandelwal, A. K. (2016). Measuring the unequal gains from trade . The Quarterly Journal of Economics, 131(3), 1113-1180.

Atkin, David, Benjamin Faber, and Marco Gonzalez-Navarro. "Retail globalization and household welfare: Evidence from Mexico." Journal of Political Economy 126.1 (2018): 1-73.

In the paper, Atkin and coauthors explore the reasons for this and find that the regressive nature of the distribution is mainly due to richer households placing higher weight on the product variety and shopping amenities on offer at these new foreign stores.

Berlingieri, G., Breinlich, H., & Dhingra, S. (2018). The Impact of Trade Agreements on Consumer Welfare—Evidence from the EU Common External Trade Policy. Journal of the European Economic Association.

Nobel laureate Paul Samuelson (1969) was once challenged by the mathematician Stanislaw Ulam: "Name me one proposition in all of the social sciences which is both true and non-trivial." It was several years later than he thought of the correct response: comparative advantage. "That it is logically true need not be argued before a mathematician; that is is not trivial is attested by the thousands of important and intelligent men who have never been able to grasp the doctrine for themselves or to believe it after it was explained to them."

(NB. This is an excerpt from https://www.wto.org/english/res_e/reser_e/cadv_e.htm)

Bernhofen, D., & Brown, J. (2004). A Direct Test of the Theory of Comparative Advantage: The Case of Japan. Journal of Political Economy, 112(1), 48-67. doi:1. Retrieved from http://www.jstor.org/stable/10.1086/379944 doi:1

Eaton, J., & Kortum, S. (2002). Technology, geography, and trade. Econometrica, 70(5), 1741-1779.

Crozet, M., & Koenig, P. (2010). Structural Gravity Equations with Intensive and Extensive Margins. The Canadian Journal of Economics / Revue Canadienne D'Economique, 43(1), 41-62. Retrieved from http://www.jstor.org/stable/40389555

Manova, Kalina. "Credit constraints, heterogeneous firms, and international trade." The Review of Economic Studies 80.2 (2013): 711-744.

Melitz, J. (2008). Language and foreign trade. European Economic Review, 52(4), 667-699.

Evenett, S. J., & Keller, W. (2002). On theories explaining the success of the gravity equation . Journal of Political Economy, 110(2), 281-316.

For more information on how the COW trade datasets were constructed see: (i) Barbieri, Katherine, and Omar M. G. Omar Keshk. 2016. Correlates of War Project Trade Data Set Codebook, Version 4.0. Available at http://correlatesofwar.org and (ii) Barbieri, Katherine, Omar M. G. Keshk, and Brian Pollins. 2009. TRADING DATA: Evaluating our Assumptions and Coding Rules. Conflict Management and Peace Science, 26(5): 471–491.

Further information on CEPII's methodology can be found in their working paper .

The chart includes series labeled by the sources as 'merchandise trade' and 'goods trade'. As we explain below, part of the asymmetries in trade data comes from the fact that, although 'merchandise' and 'goods' are equivalent in the dictionary, these two terms often measure related but different things.

For example, if there is no change in ownership (e.g. a firm exports goods to its factory in another country for processing, and then re-imports the processed goods) the manual says that statistical agencies should only record the net difference in value. You can find more details about this in an OECD Statistics Briefing .

This issue is actually also a source of disagreement between National Accounts data and customs data. You can read more about it in this report: Harrison, Anne (2013) FOB/CIF Issue in Merchandise Trade/Transport of Goods in BPM6 and the 2008 SNA, Twenty-Fifth Meeting of the IMF Committee on Balance of Payments Statistics, Washington, D.C .

Precisely because of the difficulty that arises when trying to establish the origin and final destination of merchandise, some sources distinguish between national and dyadic (i.e. 'directed') trade estimates.

For more details about general and special trade see the Eurostat glossary .

The OECD approach consists of four steps, which they describe as follows: "First, data are collected and organized, and imports are converted to FOB prices to match the valuation of exports. Secondly, data are adjusted for several specific large problems known to drive asymmetries. Presently these include “modular” adjustments for unallocated and confidential trade; for exports by Hong Kong, China; for Swiss non-monetary gold; and for clear-cut cases of product misclassifications. The list of modules is expected to grow over time. In the third step, adjusted data are balanced using a “Symmetry Index” that weights exports and imports. As the final step, the data are also converted to Classification of Products by Activity (CPA) products to better align with National Accounts statistics, such as in national Supply-Use tables." You can read more about it here . In addition to the OECD, other sources also use corrections. The IMF's DOTS dataset, for example, uses a 6 percent rule for converting import valuations (in CIF) into export values (in FOB). More information can be found in the IMF's (2018) working paper on 'New Estimates for Direction of Trade Statistics'.

For more details on this see Forstater, M. (2018) Illicit Financial Flows, Trade Misinvoicing, and Multinational Tax Avoidance: The Same or Different? , CGD Policy Paper 123.

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The State of Globalization in 2022

• Steven A. Altman
• Caroline R. Bastian

Its collapse has been vastly overstated, according to an analysis of international flows of trade, capital, information, and people.

As companies contemplate adjustments to their global strategies, it is important to recognize how much continuity there still is even in a period of wrenching change. The idea of a world where economic efficiency alone drives patterns of international flows was always a myth. Globalization has always been an uneven process, with cross-country differences and international conflicts significantly dampening international flows. That’s a big part of why — even before the present crisis in Ukraine — only about 20% of global economic output ended up in a different country from where it was produced. As the landscape shifts, global strategies must be updated, but managers should avoid the costly overreactions that tend to follow major shocks to globalization.

Russia’s invasion of Ukraine has led to a new round of predictions that the end of globalization is nigh , much like we saw at the beginning of the Covid-19 pandemic . However, global cross-border flows have rebounded strongly since the early part of the pandemic. In our view, the war will likely reduce many types of international business activity and cause some shifts in their geography, but it will not lead to a collapse of international flows.

• Steven A. Altman is a senior research scholar, adjunct assistant professor, and director of the DHL Initiative on Globalization at the NYU Stern Center for the Future of Management .
• CB Caroline R. Bastian is a research scholar at the DHL Initiative on Globalization.

Partner Center

How our interconnected world is changing

Globalization isn’t going away, but it is changing, according to recent research  from the McKinsey Global Institute (MGI). In this episode of The McKinsey Podcast , MGI director Olivia White speaks with global editorial director Lucia Rahilly about the flows of goods, knowledge, and labor that drive global integration—and about what reshaping these flows might mean for our interconnected future.

After, global brewer AB InBev has flourished in the throes of what its CFO Fernando Tennenbaum describes as the recent “twists and turns.” Find out how in this excerpt from “ How to thrive in a downturn: A CFO perspective ,” recorded in December 2022 as part of our McKinsey Live series. 1 Please note that market conditions may have changed since this interview was conducted in December 2022.

The McKinsey Podcast is cohosted by Roberta Fusaro and Lucia Rahilly.

This transcript has been edited for clarity and length.

Globalization is here to stay

Lucia Rahilly: Pundits and other public figures have wrongly predicted the demise of globalization for what seems like years. Now, given the war in Ukraine and other disruptions, many are once again sounding its death knell. What does this new MGI research  tell us about the fate of globalization? Is it really in retreat?

Olivia White: The flows of goods, the real tangible stuff, have leveled off after nearly 20-plus years of growing at twice the rate of GDP. But the flows of goods kept pace with GDP and even rose a little bit, surprisingly, in the past couple of years. Since GDP has been growing, that means actual ties have gotten stronger.

One of the most striking findings from this research was that flows representing knowledge and know-how, such as IP and data, and flows of services and international students have accelerated and are now growing faster than the flow of goods. Flows of data grew by more than 40 percent per annum over the past ten years.

Lucia Rahilly: Goods are a smaller share of total flows, a smaller share of economic output, than in the past. That doesn’t necessarily sound like a bad thing. Could it be a sign of progress?

Olivia White: The fact that certain goods are growing less quickly than other types of flows shows this shift in our economy and what’s most important to the way the economy functions. It comes on the back of a long history of different factors that influence growth and shifts in the way patterns work. What’s happening, in part, is that a variety of countries are producing more domestically—first and foremost China. That has been driving a lot of the flow down, if you take the longitudinal view, over the past ten years versus before.

The world remains interdependent

Lucia Rahilly: How interdependent would you say we are at this stage? Could you give us some examples of the ways we’re interconnected?

Olivia White: The top line is, every region in the world depends on another significant region for at least 25 percent of a flow it values most.

In general, regions that are manufacturing regions—Europe, Asia–Pacific, and China, if we look at it on its own because it’s such a large economy—depend very strongly on the rest of the world for resources: food to some degree, but really energy and minerals of different sorts. I’ll give you a few examples.

In general, regions that are manufacturing regions depend very strongly on the rest of the world for resources: food to some degree, but really energy and minerals. Olivia White

China imports over 25 percent of its minerals, from places as far-flung as Brazil, Chile, and South Africa. China imports energy, particularly in the form of oil from the Middle East and Russia. Europe is emblematic of these forms of dependency on energy. It was dependent on Russia for over 50 percent of its energy, but now that has drastically changed.

In some other regions in the world—places that are resource rich, like the Middle East, sub-Saharan Africa, and Latin America—those places are highly dependent on the rest of the world for their manufactured goods. Well over half the world’s population lives in those places. They import well over 50 percent of their electronics and similar amounts of their pharmaceuticals. They are highly dependent on other parts of the world for things that are really quite critical to development and for modern life.

North America is somewhat of a different story. We don’t have any single spot of quite as great a dependency, at least at the broad category level. We import close to 25 percent of what we use in net value terms across the spectrum, both of resources and of manufactured goods.

This doesn’t yet speak of data and IP, where, for example, the US and Europe are fairly significant producers/exporters. A country like China is a very large consumer of IP.

Lucia Rahilly: How interdependent are we in terms of the global workforce?

Olivia White: This is quite striking. We asked how many workers in regions outside North America serve North American demand. And we asked the same question for Europe. It turns out that 60 million people in regions outside North America serve North American demand, and in Europe the corresponding number is 50 million.

These numbers are very substantial versus the working populations in those countries. So when you consider how much of what North Americans or Europeans are consuming could be produced onshore, by onshore labor, the answer is not even remotely close to those sorts of numbers—at least given the means of production or the way services are delivered today and the role people play in that.

Lucia Rahilly: Let’s turn to some of the categories of flows that have increased in recent years. What’s driving growth in global flows now that the trade in goods has stabilized?

Olivia White: Flows linked to knowledge and know-how. Knowledge services that have historically grown more slowly than manufactured goods and resources, with increased global connection over time, have flipped over the past ten years.

Professional services, such as engineering services, are among those more traditional trade flows that have been growing fastest, at about 6 percent a year, versus resources, which have slowed to just around two percent. Anything that involves real know-how—engineering, but also providing, say, call center support—is in that category.

The flows of IP are growing even faster. Now, IP is tricky because accounting for it is a very tricky thing to do. But it roughly looks at flows of the fun stuff. In the report we talk about Squid Game , but IP also includes movies, streaming platforms, music, and any sort of cultural elements that we consume.

It’s also important to consider flows of patents and ideas and the way countries or companies will use ideas or know-how developed in one country to help what they do broadly across the world. Those flows have been growing at roughly 6 percent per year as well.

There are data flows—the flows of packets of data. For example, if we were in different countries while conducting this interview there would be the flows between us. There are also flows linked to our ever-expanding use of cloud and data localization. Data transfer is happening more and more quickly.

The flows of international students have also been rising. That was mightily interrupted by the pandemic, for reasons I don’t need to belabor, but these flows seem to be rebounding. It’s important to consider the degree to which those will jump back on their accelerated growth trajectory.

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How covid-19 has affected global flows.

Lucia Rahilly: You mentioned flows of international students dropping off during COVID, for the obvious reasons. Did other flows generally drop off during the pandemic? Or were there examples of flows that were particularly resilient throughout that period?

Olivia White: There’s some variation, but many flows were remarkably resilient—resilient in a way that’s a bit counter to the general narrative about what happened during the pandemic.

The flows of resources and manufactured goods jumped reasonably significantly in 2020 and 2021, both to levels of about 6 percent per year on an annualized basis. To some degree, what was happening is that cross-border flows stepped in to replace interrupted domestic production. Flows from Asia came in, for example, to the US or to Europe. We’ve seen some flows go in reverse directions. There was a bunch of interruption in domestic production, which was quite surprising.

Flows of capital also jumped quite a lot as people needed to shift the way they were financing themselves. Multinationals needed to shift the way they were financing themselves. Some were moving liquidity to different parts of the world under times of financial stress. But those jumped to levels of growth in the tens of digits from what had actually been reversed growth for the past ten years. All those things jumped. IP jumped a little bit; data remained high. So these flows have been remarkably resilient.

The good and bad news about resource concentration

Lucia Rahilly: You invoked concentration a bit when you talked about Europe being dependent on Russia for 50 percent of its energy. Can you say a bit more about what concentration means in this context and how it affects the dynamics of the way we’re connected globally?

Olivia White: From the global perspective, there are some products that truly originate in only a few places in the world, and all of us across the globe are dependent on those few places for our supply. Iron ore is quite concentrated, and cobalt is concentrated in the DRC [Democratic Republic of the Congo].

The second type of concentration is viewed from the standpoint of an individual country. Lucia, you talked about Europe and gas dependency.

For example, Germany was getting gas from only a very concentrated set of sources. These are places where, for a variety of reasons, countries have built up dependencies on just a small number of other countries.

Why has this happened? Why are we in this position? Cost is one reason. People have made decisions based on economic factors. Another reason is regional preference. Not all goods are created equal, even if they fall in the same category.

The third reason is preferential trade agreements between different countries or other forms of tariffs or taxes that shape the way flows occur. We’re in a world in which suddenly people are realizing they have to contemplate the consequences associated with concentration—not of suppliers, but of the country of origin from which they’re buying things.

Lucia Rahilly: It sounds like concentration also increases efficiency in some cases where those disruptions don’t occur. Is concentration always a bad thing? If we rethink concentration, can we expect to see some loss of efficiency in the interim?

Olivia White: No, it’s not always a bad thing. But there are a lot of considerations to make that involve costs, involve geopolitical relationships, involve the role that various countries want to play themselves, how they’re thinking about development, how they’re thinking about their workforces. All those things have to be part of the mix.

Imagine three or four different countries, each with three trading partners, and they’re largely different trading partners. Swapping off who’s supplied by whom is a huge problem of coordination.

How global chains will evolve

Lucia Rahilly: Geopolitical risks  have obviously trained a policy spotlight on reimagining these global value chains, whether for security reasons or to strengthen resilience more generally. Accepting that the world remains interdependent, how do we see trade flows continuing to evolve in coming years?

Olivia White: Broadly speaking, there are four categories of potential evolution. Semiconductors are most prominent in public discussion. Electronics, more broadly, is one of the fastest-moving value chains since 1995, with 21 percentage points of share movement per decade. Pharmaceuticals and the mining of critical minerals are other examples. And they will be part of what shifts the way that flows crisscross the globe.

Second category: textiles and apparel. This category is not as sensitive in a geopolitical sense as some of the things I was talking about before. This category is one where you actually do have new hub creation right now. Consumer electronics, other forms of electric equipment that aren’t particularly sensitive, possibly fall in that category too.

Third category: IT services and financial intermediation or professional services. That will reconfigure the ways in which services flow.

Fourth and finally, there’s the stuff that’s just going to be steady—food and beverages, paper and printing. There’s no particular reason to expect that there are strong forcing mechanisms that will change the way those things are flowing across the world right now. They’re things that have remained relatively steady for the past ten or more years.

Global flows are necessary for a net-zero transition

Lucia Rahilly: Do we have a view on whether the evolving state of global flows is helping or hindering the net-zero transition ?

Olivia White: The way I’d put it is, there is no way we move quickly toward a net-zero transition without global flows. There are certainly things about global flows that are tricky from a net-zero perspective. It costs carbon to ship things and move things a long way. But in order for net zero to be attainable, we need to make sure that energy-generating technologies and fuels are able to flow across the world.

Energy-generating technologies include both the minerals that underpin construction of those technologies and the actual manufacturing. So, in the first category, think nickel and lithium. In the second category, think about the actual manufacturing of solar panels. The minerals themselves are processed in only a few countries around the world. So people are going to have to move them from one place to another. Maybe the world could have broader diversification of such things, but on average, the timeline from discovering a mineral to being able to produce it at scale is well in excess of 16 years. If we want to move fast, we have the luxury to move things across the world. Meeting cost curves for manufacturing at scale and in locations where you have at least some established presence is going to be important.

The final element that’s crucial with respect to net zero is cross-border capital flows. It’s really important that developing countries are able to finance shifts in the way that energy is produced and consumed in their countries, which means they may have to both spend more, at least as a ratio of GDP, and have less ability to spend, given other forms of development imperative.

Multinationals and global resilience

Lucia Rahilly: What’s the role of major multinational companies as we look ahead toward reimagining the future of our global connectedness?

Olivia White: The first thing that needs to be recognized is that major multinational corporations play an outsize role in global flows today. Multinationals are responsible for about 30 percent of trade. They’re responsible for 60 percent of exports and 82 percent of exports of knowledge-intensive goods. So they disproportionately drive flows, especially the ones associated with knowledge. And therefore, they’re going to be the center of managing for their own resilience, but also in a collective sense, for the resilience of the world.

The future of global flows

Lucia Rahilly: The media tends to focus on what some see as globalization’s imminent demise. Accepting that global ties continue to bind and connect us across the world, it’s also natural for folks to have pretty strong reactions to these intense and ongoing global disruptions that we’ve experienced in recent years. How would you sum up the way we think about the future of globalization at a high level?

Olivia White: The world we live in right now is highly dependent on flows. Will those flows reconfigure and shift? Yes, absolutely. They have in the past, and they will in the future.

Lucia Rahilly: Do we see anything in the research to indicate that the world is actually moving toward decoupling, which is also very much part of the media narrative?

Olivia White: If you look along regional lines, individual regions can’t be independent. If you just start to play with what sorts of decoupling of regions would be possible, you see very quickly that it’s not something you can do.

Now, is it possible that you would get groups of countries that become more strongly interconnected among themselves and less strongly connected with others? Absolutely. It’s possible to move in that direction. The question becomes, is there an actual decoupling, or do you just have a shift in degree? As with most things in the world, the answer tends toward the shift in degree rather than an abrupt or sharp true change or decoupling.

Lucia Rahilly: Does greater regionalization improve resilience?

Olivia White: To some degree you can say, “Look, if I’m self-sufficient, I’m more resilient.” On the other hand, all of a sudden you depend on yourself for everything, and that’s a point of vulnerability in the same way that getting it only from one other person would be a problem.

There are a whole host of reasons some degree of regionalization might help. You’ve got things closer to you. But dependency just on a few sets of people, whether or not they’re in your region, means you’ve got dependency on just a few points of potential weaknesses rather than a broad web, which in general is a more resilient and robust structure.

Lucia Rahilly: Thanks so much, Olivia. That was such an interesting discussion.

Olivia White: A real pleasure, Lucia. Thank you.

Roberta Fusaro: One example of resilience is AB InBev. Here to talk about how it’s prospering in the face of worldwide disruption is its CFO, Fernando Tennenbaum. This excerpt, “ How to thrive in a downturn: A CFO perspective ,” from our McKinsey Live series, was recorded in December 2022.

Lucia Rahilly: Fernando, we’re confronting an unusual constellation of disruptions: inflation, high interest rates driving up the cost of capital, geopolitical turbulence unexpectedly upending supply chains and sending energy prices spiking—it’s genuinely a volatile moment. Tell us, how is AB InBev faring in the current context?

Fernando Tennenbaum: We’re fortunate to be in a resilient category. Despite these twists and turns in different parts of the world, beer sales have been quite strong. That said, inflation has turned out to be much higher than expected. 2 Market conditions may have changed since this interview was conducted. We need to ensure our operations are in sync with the market, to meet this unique moment. We need to understand the state of the consumer and adjust our operations accordingly.

In emerging markets like Latin America and Africa, inflation is not new news. There are different levels of inflation, but inflation has been a part of these economies for a very long time. Consumers are more used to it, companies are more used to it—and it’s probably a more straightforward discussion.

Lucia Rahilly: You’ve spent much of your career in Latin America where, as you said, inflation has historically been much higher and more volatile than in the US or in Western Europe. Walk us through some of the lessons that we in the US, for example, could learn from.

Fernando Tennenbaum: Make sure that you’re always looking at your customers, and that you’re always keeping up with inflation. You should avoid lagging too much, and you should avoid overpricing compared with inflation. If you do too little or too much, you start disturbing the health of the consumer. If you get it right, it’s probably a good thing for the business. You have to make sure you navigate the rising cost environment while ensuring that the consumer is in a good place, your product is in a good place, and the category is a healthy one. It’s a balancing act.

You should avoid lagging too much, and you should avoid overpricing compared with inflation. If you do too little or too much, you start disturbing the health of the consumer. Fernando Tennenbaum

Lucia Rahilly: AB InBev has a diverse portfolio of brands. Volumes are good. Are customers trading up or down, during this period, between your premium and mass-market brands?

Fernando Tennenbaum: Premiumization continues to be a trend, and consumers continue to trade up to premium brands. Over the course of this year, people often asked whether consumers were trading down—and we see no evidence of trading down. That is true for the US, that is true for Africa, and that is true for Latin America—which is quite unique.

I don’t know if the future will be different; the world is changing so fast. But if you were to ask me ten years from now, I’d expect premium to be even bigger than it is today.

Lucia Rahilly: Let’s talk about uncertainty. The economy could play out in many different ways. How do you manage for that?

Fernando Tennenbaum: Let’s take our debt portfolio. Now is the moment that interest rates are going up. Inflation and borrowing are going up. Overall, this tends to be bad news—but for us, it’s quite the opposite because we don’t have any debt maturing in the next three years. We prepared for this when we saw the world going to a very different place at the beginning of 2020.

We ended up raising some long-term debt and repaying all our short-term debt. Now we’re left with a debt portfolio that has an average maturity of 16 years and no meaningful amount of debt maturing in the next three years—all at a fixed rate. Since we don’t need to refinance, we’re actually buying back our debt. Rising interest rates can be good when you can buy back debt cheaper than it cost to issue.

Lucia Rahilly: You became CFO at AB InBev in 2020, when pandemic uncertainty was at its peak. Talk to us about how you navigated that period.

Fernando Tennenbaum: The first thing we did in 2020 was pump up our cash position. Not that we needed it, but I felt it would give operations peace of mind. To be prepared, we started borrowing a lot of money. And we started taking care of our people. We needed to make sure our people were safe—that was priority number one.

Once we made sure our employees were safe, our operations were safe, then we looked at opportunities and started to fast-forward. I remember we looked at May, for example, and started to see a lot of markets doing well in terms of volume. We had a lot of cash. We started buying back some debt, especially near-term debt, to create even more optionality for the future.

We also accelerated our digital transformation. The moment was uniquely suited for it. Digital was a much better way to reach customers at a time when everybody was afraid to meet in person. In hindsight, the company ended up in a much better place today than it was three years ago—in terms of our portfolio, our digital transformation, and even financially—because we acted very quickly and created a lot of optionality during the first few months of the pandemic.

Lucia Rahilly: Any mistakes to avoid?

Fernando Tennenbaum: Looking back, I wouldn’t have done anything massively different. If I had known the outcome, I might have done things differently. But without knowing the outcome, I felt that the way we managed and the optionality we created set us up well.

Lucia Rahilly: Brewing is such an agriculturally dependent business, and agriculture has been significantly disrupted, both because of the war in Ukraine and because of climate-related risk. As CFO, how do you think about sustainability in terms of longer-term value creation?

Fernando Tennenbaum: Sustainability cuts across the whole of our business. We have a lot of local suppliers—20,000 local farmers. Our brewing processes are natural. The more efficient we are there, the more sustainable we are and, actually, the more profitable we are. We have local operations, and we sell to the local community. And most of our customers are very small entrepreneurs. The more we help them, the better they can run their business. And we say beer is inclusive because we have two billion consumers.

Lucia Rahilly: Is packaging also part of the sustainability approach?

Fernando Tennenbaum: Definitely. For example, we have returnable glass bottles. That’s very efficient, very sustainable, and from an economic standpoint, that’s probably the most profitable packaging we have. It’s also the most affordable for consumers. So it’s good for us, good for the environment, and good for the consumers.

Lucia Rahilly: You said beer is inclusive in part because so many of us drink it. How else do you approach inclusion at AB InBev?

Fernando Tennenbaum: Our two billion consumers are very different from one another. We need to make sure that, as a company, we reflect our consumers. Whenever we look at our colleagues, we need to make sure they reflect the societies where we operate—and we operate in very different societies.

A diverse and inclusive team is going to be a better team. That also applies to our suppliers. For example, if you think about suppliers in Africa, some are very poor. They manage to get access to technology, which means we can track whether they’re receiving the funds we pay them. We can track where agricultural commodities are being sourced. So how we financially empower them is also a very important part of our sustainability strategy.

Lucia Rahilly: Looking ahead, how are you thinking about innovation and investment in technology, in order to enable growth?

Fernando Tennenbaum: Innovation is a key component of beer, and there are two sides to that. One is innovation in products. The other is packaging. In Mexico, for example, we have different pack sizes for different consumption occasions and consumer needs.

Beyond that, there’s also technological innovation. Take our B2B platform, which we started piloting in 2019. Now, three or four years later, we have around $30 billion of GMV [gross merchandise value] in our e-commerce platform, which is accessible in more than 19 countries. That’s the optimal portfolio to improve customer engagement at their point of sale. Before we launched our B2B platform, we used to spend seven minutes per week interacting with our customers. Today, with our B2B platform, we interact with them 30 minutes per week. We increased the number of points of sales. For example, in Brazil, we used to have 700,000 customers, and now we have more than a million customers. Previously, they were buying our products from a distributor. Now we can reach them directly with the B2B system in place.

This connection with our customers means we can do a lot of other things, like our online marketplace, where third-party products generated an annualized GMV of $850 million, up from zero four years ago. That marketplace now continues to grow and to deliver a lot of value for our customers and for ourselves.

Lucia Rahilly: One more question: If you could give one piece of advice to a brand-new CFO of a large, multinational corporation, what would it be in this market?

Fernando Tennenbaum: Make sure you plan for different scenarios. The world is moving very fast, and you can’t expect it to unfold in a certain way. But if you have options, are agile in making decisions, and have a very engaged team, then regardless of the twists and turns, you are able to meet the moment. And you are definitely able to deliver on your objectives.

Lucia Rahilly: I lied. I’m going to ask you one more. How do you see, for these new CFOs, the relationship between sustainability and inclusivity and growth? Do you see those in tension?

Fernando Tennenbaum: There is this myth that you are either sustainable or profitable. At least at AB InBev, we’re sure they go hand in hand. The more sustainable you are, the more profitable you are, and the more value you create for your different stakeholders.

Fernando Tennenbaum is the CFO of Anheuser-Busch InBev. Olivia White is a director of the McKinsey Global Institute and a senior partner in McKinsey’s Bay Area office. Roberta Fusaro is an editorial director in the Waltham, Massachusetts, office, and Lucia Rahilly is global editorial director and deputy publisher of McKinsey Global Publishing and is based in the New York office.

Comments and opinions expressed by interviewees are their own and do not represent or reflect the opinions, policies, or positions of McKinsey & Company or have its endorsement.

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Global flows: The ties that bind in an interconnected world

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Open Access

Peer-reviewed

Research Article

Globalization and Economic Growth: Empirical Evidence on the Role of Complementarities

* E-mail: [email protected]

Affiliations Faculty of Management, Universiti Teknologi Malaysia (UTM), Johor, Malaysia, Department of Management, Mobarakeh Branch, Islamic Azad University, Isfahan, Iran

Affiliation Applied Statistics Department, Economics and Administration Faculty, University of Malaya, Kuala Lumpur, Malaysia

• Parisa Samimi, 
• Hashem Salarzadeh Jenatabadi

• Published: April 10, 2014
• https://doi.org/10.1371/journal.pone.0087824
• Reader Comments

This study was carried out to investigate the effect of economic globalization on economic growth in OIC countries. Furthermore, the study examined the effect of complementary policies on the growth effect of globalization. It also investigated whether the growth effect of globalization depends on the income level of countries. Utilizing the generalized method of moments (GMM) estimator within the framework of a dynamic panel data approach, we provide evidence which suggests that economic globalization has statistically significant impact on economic growth in OIC countries. The results indicate that this positive effect is increased in the countries with better-educated workers and well-developed financial systems. Our finding shows that the effect of economic globalization also depends on the country’s level of income. High and middle-income countries benefit from globalization whereas low-income countries do not gain from it. In fact, the countries should receive the appropriate income level to be benefited from globalization. Economic globalization not only directly promotes growth but also indirectly does so via complementary reforms.

Citation: Samimi P, Jenatabadi HS (2014) Globalization and Economic Growth: Empirical Evidence on the Role of Complementarities. PLoS ONE 9(4): e87824. https://doi.org/10.1371/journal.pone.0087824

Editor: Rodrigo Huerta-Quintanilla, Cinvestav-Merida, Mexico

Received: November 5, 2013; Accepted: January 2, 2014; Published: April 10, 2014

Copyright: © 2014 Samimi, Jenatabadi. This is an open-access article distributed under the terms of the Creative Commons Attribution License , which permits unrestricted use, distribution, and reproduction in any medium, provided the original author and source are credited.

Funding: The study is supported by the Ministry of Higher Education of Malaysia, Malaysian International Scholarship (MIS). The funders had no role in study design, data collection and analysis, decision to publish, or preparation of the manuscript.

Competing interests: The authors have declared that no competing interests exist.

Introduction

Globalization, as a complicated process, is not a new phenomenon and our world has experienced its effects on different aspects of lives such as economical, social, environmental and political from many years ago [1] – [4] . Economic globalization includes flows of goods and services across borders, international capital flows, reduction in tariffs and trade barriers, immigration, and the spread of technology, and knowledge beyond borders. It is source of much debate and conflict like any source of great power.

The broad effects of globalization on different aspects of life grab a great deal of attention over the past three decades. As countries, especially developing countries are speeding up their openness in recent years the concern about globalization and its different effects on economic growth, poverty, inequality, environment and cultural dominance are increased. As a significant subset of the developing world, Organization of Islamic Cooperation (OIC) countries are also faced by opportunities and costs of globalization. Figure 1 shows the upward trend of economic globalization among different income group of OIC countries.

• PPT PowerPoint slide
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https://doi.org/10.1371/journal.pone.0087824.g001

Although OICs are rich in natural resources, these resources were not being used efficiently. It seems that finding new ways to use the OICs economic capacity more efficiently are important and necessary for them to improve their economic situation in the world. Among the areas where globalization is thought, the link between economic growth and globalization has been become focus of attention by many researchers. Improving economic growth is the aim of policy makers as it shows the success of nations. Due to the increasing trend of globalization, finding the effect of globalization on economic growth is prominent.

The net effect of globalization on economic growth remains puzzling since previous empirical analysis did not support the existent of a systematic positive or negative impact of globalization on growth. Most of these studies suffer from econometrics shortcoming, narrow definition of globalization and small number of countries. The effect of economic globalization on the economic growth in OICs is also ambiguous. Existing empirical studies have not indicated the positive or negative impact of globalization in OICs. The relationship between economic globalization and economic growth is important especially for economic policies.

Recently, researchers have claimed that the growth effects of globalization depend on the economic structure of the countries during the process of globalization. The impact of globalization on economic growth of countries also could be changed by the set of complementary policies such as improvement in human capital and financial system. In fact, globalization by itself does not increase or decrease economic growth. The effect of complementary policies is very important as it helps countries to be successful in globalization process.

In this paper, we examine the relationship between economic globalization and growth in panel of selected OIC countries over the period 1980–2008. Furthermore, we would explore whether the growth effects of economic globalization depend on the set of complementary policies and income level of OIC countries.

The paper is organized as follows. The next section consists of a review of relevant studies on the impact of globalization on growth. Afterward the model specification is described. It is followed by the methodology of this study as well as the data sets that are utilized in the estimation of the model and the empirical strategy. Then, the econometric results are reported and discussed. The last section summarizes and concludes the paper with important issues on policy implications.

Literature Review

The relationship between globalization and growth is a heated and highly debated topic on the growth and development literature. Yet, this issue is far from being resolved. Theoretical growth studies report at best a contradictory and inconclusive discussion on the relationship between globalization and growth. Some of the studies found positive the effect of globalization on growth through effective allocation of domestic resources, diffusion of technology, improvement in factor productivity and augmentation of capital [5] , [6] . In contrast, others argued that globalization has harmful effect on growth in countries with weak institutions and political instability and in countries, which specialized in ineffective activities in the process of globalization [5] , [7] , [8] .

Given the conflicting theoretical views, many studies have been empirically examined the impact of the globalization on economic growth in developed and developing countries. Generally, the literature on the globalization-economic growth nexus provides at least three schools of thought. First, many studies support the idea that globalization accentuates economic growth [9] – [19] . Pioneering early studies include Dollar [9] , Sachs et al. [15] and Edwards [11] , who examined the impact of trade openness by using different index on economic growth. The findings of these studies implied that openness is associated with more rapid growth.

In 2006, Dreher introduced a new comprehensive index of globalization, KOF, to examine the impact of globalization on growth in an unbalanced dynamic panel of 123 countries between 1970 and 2000. The overall result showed that globalization promotes economic growth. The economic and social dimensions have positive impact on growth whereas political dimension has no effect on growth. The robustness of the results of Dreher [19] is approved by Rao and Vadlamannati [20] which use KOF and examine its impact on growth rate of 21 African countries during 1970–2005. The positive effect of globalization on economic growth is also confirmed by the extreme bounds analysis. The result indicated that the positive effect of globalization on growth is larger than the effect of investment on growth.

The second school of thought, which supported by some scholars such as Alesina et al. [21] , Rodrik [22] and Rodriguez and Rodrik [23] , has been more reserve in supporting the globalization-led growth nexus. Rodriguez and Rodrik [23] challenged the robustness of Dollar (1992), Sachs, Warner et al. (1995) and Edwards [11] studies. They believed that weak evidence support the idea of positive relationship between openness and growth. They mentioned the lack of control for some prominent growth indicators as well as using incomprehensive trade openness index as shortcomings of these works. Warner [24] refuted the results of Rodriguez and Rodrik (2000). He mentioned that Rodriguez and Rodrik (2000) used an uncommon index to measure trade restriction (tariffs revenues divided by imports). Warner (2003) explained that they ignored all other barriers on trade and suggested using only the tariffs and quotas of textbook trade policy to measure trade restriction in countries.

Krugman [25] strongly disagreed with the argument that international financial integration is a major engine of economic development. This is because capital is not an important factor to increase economic development and the large flows of capital from rich to poor countries have never occurred. Therefore, developing countries are unlikely to increase economic growth through financial openness. Levine [26] was more optimistic about the impact of financial liberalization than Krugman. He concluded, based on theory and empirical evidences, that the domestic financial system has a prominent effect on economic growth through boosting total factor productivity. The factors that improve the functioning of domestic financial markets and banks like financial integration can stimulate improvements in resource allocation and boost economic growth.

The third school of thoughts covers the studies that found nonlinear relationship between globalization and growth with emphasis on the effect of complementary policies. Borensztein, De Gregorio et al. (1998) investigated the impact of FDI on economic growth in a cross-country framework by developing a model of endogenous growth to examine the role of FDI in the economic growth in developing countries. They found that FDI, which is measured by the fraction of products produced by foreign firms in the total number of products, reduces the costs of introducing new varieties of capital goods, thus increasing the rate at which new capital goods are introduced. The results showed a strong complementary effect between stock of human capital and FDI to enhance economic growth. They interpreted this finding with the observation that the advanced technology, brought by FDI, increases the growth rate of host economy when the country has sufficient level of human capital. In this situation, the FDI is more productive than domestic investment.

Calderón and Poggio [27] examined the structural factors that may have impact on growth effect of trade openness. The growth benefits of rising trade openness are conditional on the level of progress in structural areas including education, innovation, infrastructure, institutions, the regulatory framework, and financial development. Indeed, they found that the lack of progress in these areas could restrict the potential benefits of trade openness. Chang et al. [28] found that the growth effects of openness may be significantly improved when the investment in human capital is stronger, financial markets are deeper, price inflation is lower, and public infrastructure is more readily available. Gu and Dong [29] emphasized that the harmful or useful growth effect of financial globalization heavily depends on the level of financial development of economies. In fact, if financial openness happens without any improvement in the financial system of countries, growth will replace by volatility.

However, the review of the empirical literature indicates that the impact of the economic globalization on economic growth is influenced by sample, econometric techniques, period specifications, observed and unobserved country-specific effects. Most of the literature in the field of globalization, concentrates on the effect of trade or foreign capital volume (de facto indices) on economic growth. The problem is that de facto indices do not proportionally capture trade and financial globalization policies. The rate of protections and tariff need to be accounted since they are policy based variables, capturing the severity of trade restrictions in a country. Therefore, globalization index should contain trade and capital restrictions as well as trade and capital volume. Thus, this paper avoids this problem by using a comprehensive index which called KOF [30] . The economic dimension of this index captures the volume and restriction of trade and capital flow of countries.

Despite the numerous studies, the effect of economic globalization on economic growth in OIC is still scarce. The results of recent studies on the effect of globalization in OICs are not significant, as they have not examined the impact of globalization by empirical model such as Zeinelabdin [31] and Dabour [32] . Those that used empirical model, investigated the effect of globalization for one country such as Ates [33] and Oyvat [34] , or did it for some OIC members in different groups such as East Asia by Guillaumin [35] or as group of developing countries by Haddad et al. [36] and Warner [24] . Therefore, the aim of this study is filling the gap in research devoted solely to investigate the effects of economic globalization on growth in selected OICs. In addition, the study will consider the impact of complimentary polices on the growth effects of globalization in selected OIC countries.

Model Specification

Methodology and Data

This paper applies the generalized method of moments (GMM) panel estimator first suggested by Anderson and Hsiao [38] and later developed further by Arellano and Bond [39] . This flexible method requires only weak assumption that makes it one of the most widely used econometric techniques especially in growth studies. The dynamic GMM procedure is as follow: first, to eliminate the individual effect form dynamic growth model, the method takes differences. Then, it instruments the right hand side variables by using their lagged values. The last step is to eliminate the inconsistency arising from the endogeneity of the explanatory variables.

The consistency of the GMM estimator depends on two specification tests. The first is a Sargan test of over-identifying restrictions, which tests the overall validity of the instruments. Failure to reject the null hypothesis gives support to the model. The second test examines the null hypothesis that the error term is not serially correlated.

The GMM can be applied in one- or two-step variants. The one-step estimators use weighting matrices that are independent of estimated parameters, whereas the two-step GMM estimator uses the so-called optimal weighting matrices in which the moment conditions are weighted by a consistent estimate of their covariance matrix. However, the use of the two-step estimator in small samples, as in our study, has problem derived from proliferation of instruments. Furthermore, the estimated standard errors of the two-step GMM estimator tend to be small. Consequently, this paper employs the one-step GMM estimator.

In the specification, year dummies are used as instrument variable because other regressors are not strictly exogenous. The maximum lags length of independent variable which used as instrument is 2 to select the optimal lag, the AR(1) and AR(2) statistics are employed. There is convincing evidence that too many moment conditions introduce bias while increasing efficiency. It is, therefore, suggested that a subset of these moment conditions can be used to take advantage of the trade-off between the reduction in bias and the loss in efficiency. We restrict the moment conditions to a maximum of two lags on the dependent variable.

Data and Empirical Strategy

We estimated Eq. (1) using the GMM estimator based on a panel of 33 OIC countries. Table S1 in File S1 lists the countries and their income groups in the sample. The choice of countries selected for this study is primarily dictated by availability of reliable data over the sample period among all OIC countries. The panel covers the period 1980–2008 and is unbalanced. Following [40] , we use annual data in order to maximize sample size and to identify the parameters of interest more precisely. In fact, averaging out data removes useful variation from the data, which could help to identify the parameters of interest with more precision.

The dependent variable in our sample is logged per capita real GDP, using the purchasing power parity (PPP) exchange rates and is obtained from the Penn World Table (PWT 7.0). The economic dimension of KOF index is derived from Dreher et al. [41] . We use some other variables, along with economic globalization to control other factors influenced economic growth. Table S2 in File S2 shows the variables, their proxies and source that they obtain.

We relied on the three main approaches to capture the effects of economic globalization on economic growth in OIC countries. The first one is the baseline specification (Eq. (1)) which estimates the effect of economic globalization on economic growth.

The second approach is to examine whether the effect of globalization on growth depends on the complementary policies in the form of level of human capital and financial development. To test, the interactions of economic globalization and financial development (KOF*FD) and economic globalization and human capital (KOF*HCS) are included as additional explanatory variables, apart from the standard variables used in the growth equation. The KOF, HCS and FD are included in the model individually as well for two reasons. First, the significance of the interaction term may be the result of the omission of these variables by themselves. Thus, in that way, it can be tested jointly whether these variables affect growth by themselves or through the interaction term. Second, to ensure that the interaction term did not proxy for KOF, HCS or FD, these variables were included in the regression independently.

In the third approach, in order to study the role of income level of countries on the growth effect of globalization, the countries are split based on income level. Accordingly, countries were classified into three groups: high-income countries (3), middle-income (21) and low-income (9) countries. Next, dummy variables were created for high-income (Dum 3), middle-income (Dum 2) and low-income (Dum 1) groups. Then interaction terms were created for dummy variables and KOF. These interactions will be added to the baseline specification.

Findings and Discussion

This section presents the empirical results of three approaches, based on the GMM -dynamic panel data; in Tables 1 – 3 . Table 1 presents a preliminary analysis on the effects of economic globalization on growth. Table 2 displays coefficient estimates obtained from the baseline specification, which used added two interaction terms of economic globalization and financial development and economic globalization and human capital. Table 3 reports the coefficients estimate from a specification that uses dummies to capture the impact of income level of OIC countries on the growth effect of globalization.

https://doi.org/10.1371/journal.pone.0087824.t001

https://doi.org/10.1371/journal.pone.0087824.t002

https://doi.org/10.1371/journal.pone.0087824.t003

The results in Table 1 indicate that economic globalization has positive impact on growth and the coefficient is significant at 1 percent level. The positive effect is consistent with the bulk of the existing empirical literature that support beneficial effect of globalization on economic growth [9] , [11] , [13] , [19] , [42] , [43] .

According to the theoretical literature, globalization enhances economic growth by allocating resources more efficiently as OIC countries that can be specialized in activities with comparative advantages. By increasing the size of markets through globalization, these countries can be benefited from economic of scale, lower cost of research and knowledge spillovers. It also augments capital in OICs as they provide a higher return to capital. It has raised productivity and innovation, supported the spread of knowledge and new technologies as the important factors in the process of development. The results also indicate that growth is enhanced by lower level of government expenditure, lower level of inflation, higher level of human capital, deeper financial development, more domestic investment and better institutions.

Table 2 represents that the coefficients on the interaction between the KOF, HCS and FD are statistically significant at 1% level and with the positive sign. The findings indicate that economic globalization not only directly promotes growth but also indirectly does via complementary reforms. On the other hand, the positive effect of economic globalization can be significantly enhanced if some complementary reforms in terms of human capital and financial development are undertaken.

In fact, the implementation of new technologies transferred from advanced economies requires skilled workers. The results of this study confirm the importance of increasing educated workers as a complementary policy in progressing globalization. However, countries with higher level of human capital can be better and faster to imitate and implement the transferred technologies. Besides, the financial openness brings along the knowledge and managerial for implementing the new technology. It can be helpful in improving the level of human capital in host countries. Moreover, the strong and well-functioned financial systems can lead the flow of foreign capital to the productive and compatible sectors in developing countries. Overall, with higher level of human capital and stronger financial systems, the globalized countries benefit from the growth effect of globalization. The obtained results supported by previous studies in relative to financial and trade globalization such as [5] , [27] , [44] , [45] .

Table (3 ) shows that the estimated coefficients on KOF*dum3 and KOF*dum2 are statistically significant at the 5% level with positive sign. The KOF*dum1 is statistically significant with negative sign. It means that increase in economic globalization in high and middle-income countries boost economic growth but this effect is diverse for low-income countries. The reason might be related to economic structure of these countries that are not received to the initial condition necessary to be benefited from globalization. In fact, countries should be received to the appropriate income level to be benefited by globalization.

The diagnostic tests in tables 1 – 3 show that the estimated equation is free from simultaneity bias and second-order correlation. The results of Sargan test accept the null hypothesis that supports the validity of the instrument use in dynamic GMM.

Conclusions and Implications

Numerous researchers have investigated the impact of economic globalization on economic growth. Unfortunately, theoretical and the empirical literature have produced conflicting conclusions that need more investigation. The current study shed light on the growth effect of globalization by using a comprehensive index for globalization and applying a robust econometrics technique. Specifically, this paper assesses whether the growth effects of globalization depend on the complementary polices as well as income level of OIC countries.

Using a panel data of OIC countries over the 1980–2008 period, we draw three important conclusions from the empirical analysis. First, the coefficient measuring the effect of the economic globalization on growth was positive and significant, indicating that economic globalization affects economic growth of OIC countries in a positive way. Second, the positive effect of globalization on growth is increased in countries with higher level of human capital and deeper financial development. Finally, economic globalization does affect growth, whether the effect is beneficial depends on the level of income of each group. It means that economies should have some initial condition to be benefited from the positive effects of globalization. The results explain why some countries have been successful in globalizing world and others not.

The findings of our study suggest that public policies designed to integrate to the world might are not optimal for economic growth by itself. Economic globalization not only directly promotes growth but also indirectly does so via complementary reforms.

The policy implications of this study are relatively straightforward. Integrating to the global economy is only one part of the story. The other is how to benefits more from globalization. In this respect, the responsibility of policymakers is to improve the level of educated workers and strength of financial systems to get more opportunities from globalization. These economic policies are important not only in their own right, but also in helping developing countries to derive the benefits of globalization.

However, implementation of new technologies transferred from advanced economies requires skilled workers. The results of this study confirm the importance of increasing educated workers as a complementary policy in progressing globalization. In fact, countries with higher level of human capital can better and faster imitate and implement the transferred technologies. The higher level of human capital and certain skill of human capital determine whether technology is successfully absorbed across countries. This shows the importance of human capital in the success of countries in the globalizing world.

Financial openness in the form of FDI brings along the knowledge and managerial for implementing the new technology. It can be helpful in upgrading the level of human capital in host countries. Moreover, strong and well-functioned financial systems can lead the flow of foreign capital to the productive and compatible sectors in OICs.

In addition, the results show that economic globalization does affect growth, whether the effect is beneficial depends on the level of income of countries. High and middle income countries benefit from globalization whereas low-income countries do not gain from it. As Birdsall [46] mentioned globalization is fundamentally asymmetric for poor countries, because their economic structure and markets are asymmetric. So, the risks of globalization hurt the poor more. The structure of the export of low-income countries heavily depends on primary commodity and natural resource which make them vulnerable to the global shocks.

The major research limitation of this study was the failure to collect data for all OIC countries. Therefore future research for all OIC countries would shed light on the relationship between economic globalization and economic growth.

Supporting Information

Sample of Countries.

https://doi.org/10.1371/journal.pone.0087824.s001

The Name and Definition of Indicators.

https://doi.org/10.1371/journal.pone.0087824.s002

Author Contributions

Conceived and designed the experiments: PS. Performed the experiments: PS. Analyzed the data: PS. Contributed reagents/materials/analysis tools: PS HSJ. Wrote the paper: PS HSJ.

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Essay on Globalization for Students and Children

500+ words essay on globalization.

Globalization refers to integration between people, companies, and governments. Most noteworthy, this integration occurs on a global scale. Furthermore, it is the process of expanding the business all over the world. In Globalization, many businesses expand globally and assume an international image. Consequently, there is a requirement for huge investment to develop international companies.

How Globalization Came into Existence?

First of all, people have been trading goods since civilization began. In the 1st century BC, there was the transportation of goods from China to Europe. The goods transportation took place along the Silk Road. The Silk Road route was very long in distance. This was a remarkable development in the history of Globalization. This is because, for the first time ever, goods were sold across continents.

Globalization kept on growing gradually since 1st BC. Another significant development took place in the 7th century AD. This was the time when the religion of Islam spread. Most noteworthy, Arab merchants led to a rapid expansion of international trade . By the 9th century, there was the domination of Muslim traders on international trade. Furthermore, the focus of trade at this time was spices.

True Global trade began in the Age of Discovery in the 15th century. The Eastern and Western continents were connected by European merchants. There was the discovery of America in this period. Consequently, global trade reached America from Europe.

From the 19th century, there was a domination of Great Britain all over the world. There was a rapid spread of international trade. The British developed powerful ships and trains. Consequently, the speed of transportation greatly increased. The rate of production of goods also significantly increased. Communication also got faster which was better for Global trade .

Finally, in 20th and 21st -Century Globalization took its ultimate form. Above all, the development of technology and the internet took place. This was a massive aid for Globalization. Hence, E-commerce plays a huge role in Globalization.

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Impact of Globalization

First of all, Foreign Direct Investment (FDI) increases at a great rate. This certainly is a huge contribution of Globalization. Due to FDI, there is industrial development. Furthermore, there is the growth of global companies. Also, many third world countries would also benefit from FDI.

Technological Innovation is another notable contribution of Globalization. Most noteworthy, there is a huge emphasis on technology development in Globalization. Furthermore, there is also technology transfer due to Globalization. The technology would certainly benefit the common people.

The quality of products improves due to Globalization. This is because manufacturers try to make products of high-quality. This is due to the pressure of intense competition. If the product is inferior, people can easily switch to another high-quality product.

To sum it up, Globalization is a very visible phenomenon currently. Most noteworthy, it is continuously increasing. Above all, it is a great blessing to trade. This is because it brings a lot of economic and social benefits to it.

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The Effect of Globalization on a World Culture Essay

Introduction, globalization and culture.

Scientific innovations and inventions have accelerated the growth of globalization. Nations can easily trade, socialize, share ideas, and assist each other in different spheres of life.

Improved international relations have enabled the movement of factors of production among nations with minimal barriers to trade. The cooperation has led to social, political, and economical globalization; although neither of the above three classifications of globalization have been fully attained, their effects can be felt in economic, political, and social spheres of life.

Critics of globalization appreciate that it has positive effect on economic wellbeing of countries. However they are quick to point out that globalization has high culture and identity loss/costs (Sheila 56). They are of the opinion that modernization has the potential of running roughshod over the world’s distinctive cultures and creates a single world which resembles a tawdry mall. This paper discuses the effect of globalization on a world culture.

Culture is the identity of people that any member adheres to. It has some defined attributes, some of them are written and others are not. The set way of operation that is governed by some cultural, communal, and societal goals assists in holding people together and creates a norm in the community.

When people trade, socialize or interact with each other in a way it has been enabled by globalization, there is the tendency that they will lose their identity and inherit a system of operation or a certain mode of conduct that is generally accepted by the community (in this instance, the word community has been used to refer to the larger global community created by globalization).

According to Tyler Cowen, modernization and cultural globalization have resulted into the growth of creativity, innovation, and invention among communities. When people interact, they tend to learn the other parties’ way of operation and the difference is likely to trigger some creative mind for the benefit of the two parties.

The above observation by Tyler Cowen can be interpolated either negatively or positively; from a positive angle, modernization has created a room for invention and innovation. On a negative note, the world is utilizing the differences it has as failing to create more differences that future generation is likely to run out of creative mind, as there will be lack of motivation in the form of current culture differences.

For example, in the 1950s, Cuban Music and Reggae was produced in Cuba with the target consumers as American Tourists who visited the country. In Cuba, the style of music was part of their tradition that the Americans loved to sing along. With diffusion of culture and more exposure, the style of music has been adopted by the Americans, and today it is played in modern clubs and bars.

Today, if a Cuban was to visit the United States, he or she was likely to feel accommodated by the structures as there are some similar attributes that he/she gets. In either French or German restaurants, a shopper is able to buy Sushi (Japanese foods consisting of cooked vinegared rice (shari) combined with other ingredients (neta)). Such a move shows how Japanese have been accommodated in both European countries (Sheila 256).

With cultural globalization, people of different cultures, ethnicities, nationalities, religions, and values find themselves in the same atmosphere where no one has the freedom to fully adhere or practice his culture. With such kind of setting, the most probable thing that can happen is people to develop a set of culture that will assist them transact business despite their differences.

The net result is a global culture; the effect and extent that global culture has gone in the world varied among nations and continents; developed countries have their culture more diffused and uniformity can be seen from their way of operation. In developing countries, there is a tendency of resistance to change the culture, but the force therein is strong. Efforts to change the culture of people are not deliberate, but they are necessitated by the prevailing condition in the world.

In contemporary business environments, organizations hire employees of different nationalities, ethnic backgrounds, cultural believes, intellectual capacity, and age. The nature and mix of employees calls for management to develop policies and management mechanisms that will gain from the differences in their human capital; to manage the diverse personnel, business leaders need to adopt international human resources management strategy (IHRM).

The policies that organizations embark on should entail policies that address diverse human resource issues; organization stands to benefit from diversity if the right management policies are set in place, but there is the risk that the differences create uniform business practice. With diffusion of cultures, management can enact some common human resource policies that cut across its diverse human capital. However, care should be exercised since chances of repellence in the event policies seem to be confronting with culture of people.

When managing human capital of different nationalities, businesses leaders should make policies that can assist in tapping their organization’s personnel’s intellectual capacity, as it grows their talents and skills. Culture is likely to affect people in different spheres, thus when companies have diverse human resources, they have to ensure that their programs are sensitive to the differences in culture and beliefs.

When working in different countries, management should never assume that the human management style adopted in the country is fully-effective and applicable to another country; they should take their time, understand what the other country’s employee value and consider best. Management gurus continue to offer insights of how culture and ethnicity of a people affect their performance in their works; they have suggested culture intelligence to assist organization handle their employees effectively regardless of their nationality.

When making business decisions, the culture and exposure that someone has is likely to affect the kind of decision that he is going to make; people who are exposed to the right materials through televisions, the internet, and print media are likely to make more informed decisions. With culture globalization, there has been exposure to different settings and information is available through the assistance of communication channels; the resultant community is an informed community that can make quality decisions for the exploitation of available resources effectively.

Differences in norms and culture among different ethnicity, nationalities, and communities has been a hindrance to effective trade, to some extent, the differences have acted as non tariff barriers that has hindered the development of trade.

When people interact and change their cultural beliefs to adopt a uniform set of beliefs, they are breaking the unseen barriers of trade and create a room for more business, ideas, equality, and economic development. For example, among the Muslims, Women had been regarded as inferior to men and they could hardly be allowed to take leadership positions.

With the interaction with Christians and getting their take on the same, there has been a wave in the community that has enabled them to seek leadership positions like men have. The above case has shown how culture globalization has created opportunities to different people and enabled women to get more opportunities. In the developed worlds, the state and position of the woman had been respected long before the same was done in developing worlds.

As the developed and developing countries trade among each other, the developing countries are getting into the system and women have started to have their positions in the communities. Gender differences has been minimized by globalization, there has been the reduction on gender differences among communities were human beings can now relate more as people not on gender grounds as the case had been when culture globalization was not adhered to.

The rights of girl child campaigns have gained roots in different countries as culture diffuses to reinforce and create awareness to the need to protect women and reduce gender differences that have prevailed among communities for a lengthy duration.

When people of different cultures interact, they develop the sense of togetherness and there are shared common interests that are developed; globalization has enabled the interaction, as well as sharing of ideas, opinions, view points and ways of doing things in a way that facilitates trade. Trade prevails better when the trading partners have some common values, attributes, and beliefs.

Culture globalization has enabled people to have the same perception and attitude towards similar products; with the similarity, peace and harmony in doing and handling issues have been developed. When there is peace and harmony, business and trade prevail effectively.

When people share culture, it means that when someone is in a geographical location different from his or hers, coping will be easy as there will be likelihood that the person will get something that is the same with what he or she beliefs.

For example, although the Chinese food is different from American food, a Chinese visiting the United States only need to establish the restaurant selling Chinese food as the nature and the diversity has been accepted by both the communities. Sales and marketers have much to benefit from globalized world, they can easily develop new formats and marketing strategies developed can be similar and message passed remains the same.

According to Benjamin Barber, one of the main challenges that have been brought about by globalization is culture borrowing and culture mimicry; with the borrowing and mimicry people have lost their sense of identity that someone can manage to treat his brother wrongly and hide under the new system of global culture.

Although culture globalization has not been fully attained, there are moves that indicate that its full operation cannot happen. In areas like religion (religion is an aspect of culture), changing people’s religious believes have been a challenge. The existence of some elements that can hardly change results to the notion of global culture being a mere statement by advocators of the integration, the situation cannot be attained.

Some industries in the globe exist because of differences in culture of people, for example, the tourism industry is much dependent on the cultural differences of people in different places. With culture diffusion, the industry is likely to suffer a huge blow.

In Kenya, the East African country whose tourism is the second earner of the foreign exchange has multicultural where the tourisms from different countries visit to enjoy and learn the diversity of the country’s population.

The move to global culture is thus likely to injure some industries while supporting others. Culture within communities is supported by generally agreed attributes that passes from one generation to another. The “nature of passing” of modern global culture is challenging as people or the global community has not set mechanisms to pass the culture, reinforce, or even punish offender.

To pass the global culture, the materials that young generation become exposed to modern methods of passing information like television, radio, the internet, peers, and written materials. When such materials have been used to pass culture, there are high chances that young generation will get reinforcement of culture which is not good. Global culture is more likely to be for the larger global community benefit, but rarely does it address issue of an individual.

With the structures and development of global culture, there cannot be said to have an effective method of culture reinforcement or a system to punish offender. This means that the culture is vulnerable to changes and hicks ups. Any small attribute or change in the global world is likely to shake the culture of the people since it’s not based on a strong foundation.

With globalization, companies can work in different parts of the world as multinationals; however they have to be sensitive to the nature of products, services, and structure of employees they deploy. Multinationals generally have three main methods to get their employees on board, they use a localization approach, expatriates approach, and a third country approach.

To maintain quality and quantity workforce, the management should ensure that they are aware of the culture of people and manage them effectively. The challenge that multinationals have is putting the notion that with culture globalization, there is uniformity, thus there is no need to have culture intelligence and culture awareness programs.

For example, Pepsi has been a major competitor in the American industry as its style is more American, however the brand has not maintained strong competitiveness in African countries since its style of marketing and sales fails to meet the needs of the continents culture. The above example shows how the notion of global culture has been mis-interpolated (Sheila 256).

Other than human resources, department maintaining qualified and efficient human capital at the most affordable cost possible, they have the role of ensuring they combine their human capital in a manner that will benefit the entire organization.

Diversity and difference in culture by itself offers an organization rich knowledge, opinions, values, and experience, with culture globalization such important attributes to business competitiveness are lost; before an organization decides to fill a certain vacancy in its system, the human resources should liaise with the departmental heads to know exactly the kind of qualification that are sort for, in some instances, the management may advice for some age gap, nationality, gender, and experience.

It is through effective recruitment that an organization can build an effective team that meets its personnel requirement needs. When enacting empowerment and motivational policies or schemes, the management should ensure that the diversity of its employees has been considered.

There are people who are generally team-players, others prefer individualism, and others are charismatic leaders. When making decision, it is important to consider the diversity. Management gurus has continually advised companies to have culture coaches when operating in a country they are not very sure of the nature and the culture of the people; with the coaches, they can develop orchestrate teams and make products that meet the requirement of customers in the country.

Diverse human resource can be biennial to an organization is managed effectively; failure to manage diversity effectively means exposure to risks. Management gurus have continued to support the use of culture intelligence and culture awareness programs to support the culture awareness within organizations; those companies that have undertaken the advice are doing better than those who have not.

Although cultural globalization has build strong operating base through which trade can prevail, it has brought some challenges to the world and the people in general. The lack of identity has resulted into sharing of values likely to dilute societal values and norms.

When the community lacks strong values that are maintained with a certain mechanism, the result is a disintegrated society were social evils are the order of the day. For example, in developed countries, one of the vises that the countries are dealing with is use of drugs and substance abuse by young people.

Although this is taken as a normal condition or social evil, psychologists have suggested that lack of strong values and low behavior standards by young people can be to blame. When the blame is further analyzed, it is seen that parents are not able to raise morally upright children as they have less regard to their cultural beliefs and practices which they consider to have been eroded by globalization.

With diffusion of cultures, there is less emphasis on family and societal values, parents and the community in general seem to ignore the need to maintain, pass and transfer culture to younger generations. When culture is not transferred, children are exposed to new global culture that might be different from the norm.

The results are the families that have low moral standards and which values are questionable. Generally, organizations require physical, human, and informational resources for their operation; business-leaders should realize that human capital is the most crucial capital their organizations have.

In a modern globalized world, organizations have diverse human capital; to manage the capital effectively, companies need to adopt international human resources management strategy. The strategy assists an organization benefit from its personnel diversity as it mitigates risks associated with a diverse workforce. With culture globalization the workforce seems to have the same ideologies an attributes that hinder creativity, innovation, and invention (Sheila 56-78).

Globalization has resulted into culture diffusion, culture sharing, and multiculturalism; the uniformity in culture facilitates trade among nations and promotes international relations and understanding.

However, multiculturalism has been blamed of dilution of people’s cultural values, norms, and virtues. Multiculturalism has also been challenged as a mere statement by business philosophers that will not be attained in the near future as family structures vary among different parts of the globe.

Sheila, Lucy. Globalization and Belonging: The Politics of Identity in a Changing World . London: Rowman & Littlefield, 2004.

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IvyPanda. (2018, October 25). The Effect of Globalization on a World Culture. https://ivypanda.com/essays/globalization-and-culture/

"The Effect of Globalization on a World Culture." IvyPanda , 25 Oct. 2018, ivypanda.com/essays/globalization-and-culture/.

IvyPanda . (2018) 'The Effect of Globalization on a World Culture'. 25 October.

IvyPanda . 2018. "The Effect of Globalization on a World Culture." October 25, 2018. https://ivypanda.com/essays/globalization-and-culture/.

1. IvyPanda . "The Effect of Globalization on a World Culture." October 25, 2018. https://ivypanda.com/essays/globalization-and-culture/.

Bibliography

IvyPanda . "The Effect of Globalization on a World Culture." October 25, 2018. https://ivypanda.com/essays/globalization-and-culture/.