## Globalization Today

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### Historical context and drivers
- Globalization has alternately pulled countries closer together and pushed them farther apart for at least 150 years.
- It began around 1870 and accelerated after World War II as countries reduced restrictions on capital and trade flows.
- Broader integration followed the fall of the Berlin Wall, financial deregulation, and rounds of trade liberalization culminating in the establishment of the World Trade Organization (WTO) in 1995.
- Technological and organizational advances lowered trade and transactional costs: container shipping, deepwater ports, jet engines, fax machines, personal computers, mobile devices, and the global rollout of internet connectivity.

### Upsides of globalization
- Production was unbundled into multiple stages, allowing production where it could be done more efficiently and increasing output from the same resources.
- Foreign competition spurred higher productivity; consumers gained access to a greater variety of goods at more affordable prices.
- Developing economies benefited from participating in global value chains without having to develop entire domestic industries.
- World income convergence and poverty reduction: poverty rates decreased from 47 percent in 1980 to 16 percent in 2010.

### Downsides and distributional effects
- Domestic adjustments were sometimes difficult as workers and capital moved across industries; outcomes depended on domestic labor-market support and social insurance programs.
- Workers with lower skills in some places lost jobs or experienced wage declines; negative consequences were "concentrated, sometimes harsh, and often prolonged."
- Financial globalization is seen by some economists as having made the world economy more volatile and crisis-prone, requiring stronger macroeconomic governance and institutions.
- Globalization may have contributed to rising income inequality over the past four decades, though taxation, redistribution, and technological change that favored high-skilled workers and investors also played major roles.

### Measuring globalization: traditional and newer metrics
- Traditional measures: trade openness (total value of imports and exports as a share of GDP), openness to foreign direct investment, tariffs, capital account restrictions, daily cross-border financial transactions, number of visas for foreign students and workers.
- Aggregate picture: globalization expanded rapidly from the 1980s until the global financial crisis, after which it plateaued.
- Newer metrics:
  - Foreign value-added content of exports increased from about 19 percent in the mid-1990s to 28 percent in 2022, indicating continued deepening of trade integration.
  - Digitally delivered services already account for 54 percent of services trade, following growth of 8 percent annually over the past two decades.
- Despite acceleration in some areas, cracks are emerging due to national security and supply-chain resilience concerns highlighted by the COVID-19 pandemic, Russia’s war in Ukraine, and intensifying geopolitical rivalries.

### Policy shifts, restrictions, and trade patterns
- Trade and foreign direct investment restrictions have proliferated, increasing about threefold since 2018.
- Industrial policy has re-emerged, with trade-disrupting measures affecting at least a fifth of global trade in 2023.
- Policy restrictiveness for digital services has increased in the past decade.
- Recent studies point to a rotation of trade toward geopolitically closer partners, especially in strategic sectors—potentially lengthening supply chains and increasing costs rather than reducing vulnerabilities.
- The multilateral trading system is "ill-equipped to respond," and its credibility is suffering.

### Stakes and costs of reversal
- Reversing globalization would "almost certainly reverse its gains, increase poverty, and result in a costly transition."
- IMF research estimates global losses from trade fragmentation could range from 0.2 to 7 percent of GDP.
- Costs could be higher when accounting for technological decoupling.

### Policy recommendations to preserve and improve globalization
- Restore and strengthen a well-functioning system of global trade rules underpinned by the WTO to maintain trade openness, stability, and predictability.
  - Accelerate WTO reforms to strengthen transparency and rules, including on subsidies.
  - Restore a fully functioning dispute-settlement system.
  - Update the rulebook to account for the growing share of services and digital trade.
- Use plurilateral agreements among interested subsets of WTO members to advance cooperation in areas such as e-commerce and investment facilitation, while allowing others to join later.
- Strengthen domestic policies to share trade and technology benefits more fairly:
  - Sound macroeconomic governance, financial regulation, and supervision to avoid buildup of risk from financial globalization.
  - Tax systems geared toward efficient revenue mobilization.
  - Labor market and fiscal policies to address worker dislocations and inequality, particularly amid disruptions from new technologies such as artificial intelligence.
  - Provision of high-quality basic public services, including education and health, and social safety nets.
- International organizations should act as buffers in uncertain times, promote commonly agreed-on rules of the road, and serve as conduits for dialogue and cooperation.

*Adam Jakubik is an economist and Elizabeth Van Heuvelen is a senior economist in the IMF’s Strategy, Policy, and Review Department.*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2024/06/b2b-june24.pdf_