Globalisation and its effects
Over recent decades, trade, investment, and supply chains have tied economies together. The effects on growth, jobs, and inequality are hotly debated.
What globalisation is
Globalisation is the growing integration of economies through trade in goods and services, flows of capital, movement of people, and spread of ideas and technology. World trade as a share of world output roughly doubled between 1970 and 2008, helped by cheaper shipping (containerisation), lower tariffs, and the internet.
Global supply chains
Many products are now made across several countries: a smartphone may be designed in one country, use components from several others, and be assembled in another. This lets each stage happen where it is cheapest, but makes supply chains vulnerable to disruptions, as the COVID-19 pandemic showed.
Trade and growth
Countries that opened to trade, such as South Korea from the 1960s and China after 1978, achieved rapid growth and lifted hundreds of millions of people out of poverty. Trade gives access to larger markets, technology, and competition, although openness alone does not guarantee growth.
Trade and jobs
Research on the 'China shock' found that rapid growth of Chinese imports after 2001 cost many US manufacturing jobs, with lasting effects concentrated in particular towns. Overall employment depends on many factors, but trade's costs can be highly concentrated while its benefits are widely spread.
Trade adjustment
Policies to help workers adjust to trade include retraining, wage insurance, unemployment benefits, and help moving to new jobs. The US Trade Adjustment Assistance programme is one example; many economists argue such support has been too small relative to the disruption.
Exchange rates and trade
Exchange rates affect trade: if a country's currency weakens, its exports become cheaper abroad and imports more expensive at home, boosting net exports. Trade balances also reflect saving and investment patterns, not just trade policy.
Recent trends
Since the 2008 financial crisis, the growth of trade relative to output has slowed, sometimes called 'slowbalisation'. Concerns about security, supply chain resilience, and geopolitical rivalry have led to more tariffs, export controls on advanced technologies, and efforts to bring some production closer to home (reshoring or friend-shoring).
Worked example
A clothing factory closes in a small town after imports become cheaper. Consumers nationwide save a few dollars each on clothes, adding up to a large total gain. But hundreds of local workers lose jobs and the town's shops suffer. Retraining and support can spread the gains more fairly, while keeping the benefits of trade.
Key takeaways
Globalisation integrates economies through trade, capital, people, and ideas, aided by containerisation and lower tariffs. Global supply chains lower costs but can be fragile. Openness has helped countries like South Korea and China grow fast. Trade's costs can be concentrated in particular places, as the China shock showed, so adjustment policies matter. Recent years have seen slower trade growth and more protection.
Flashcard
Integration of economies worldwide
Check your understanding
Why can trade be economically beneficial overall yet politically unpopular in some regions?