Causes and Drivers of Economic Globalization

Economic globalization is the growing integration of national economies through trade, investment, finance, technology and the movement of people, and its main drivers are cheaper transport and communication, trade liberalization, the activities of transnational corporations, financial deregulation and the opening of large economies such as China. In brief: containers and jet aircraft cut the cost and time of moving goods; the internet and telecommunications cut the cost of moving information; trade agreements lowered tariffs; and the end of the Cold War opened new markets. Together, they allowed production and finance to be organized across the world.

Globalization has brought growth and cheaper goods, but also uneven benefits and new risks. This guide explains each of the main drivers, how they reinforce each other, compares them in a table, works through example calculations, outlines the history of globalization and corrects common mistakes.

How did transport drive globalization?

Falling transport costs are a basic reason why goods can be made far from where they are consumed. Steamships and railways in the 19th century made long-distance trade cheaper. Containerization, introduced in the 1950s, standardized cargo and made handling in ports much faster and cheaper, so that shipping a manufactured good across an ocean often adds only a small share to its price. Jet aircraft reduced travel times and made it possible to move people, and urgent or high-value cargo, around the world in hours. Large investments in ports, motorways and airports in many countries supported this trend.

How did communication technology drive it?

Information technology allows firms to coordinate production in many countries and to sell services across borders. The telegraph and telephone made it possible to manage faraway operations, and in the late 20th century, satellites, fiber-optic cables, personal computers, mobile phones and the internet reduced the cost of communication to almost nothing. This made it possible to outsource services such as call centers, software development and accounting to countries such as India and the Philippines, and enabled online trade, instant financial transactions and the spread of ideas and culture.

How did trade policy and institutions drive it?

After the Second World War, countries reduced tariffs in successive rounds of negotiations under the General Agreement on Tariffs and Trade (GATT), which was replaced by the World Trade Organization (WTO) in 1995. Regional agreements, such as the European single market (1993), NAFTA (1994, replaced by USMCA in 2020) and ASEAN, removed barriers among members. Many developing countries moved away from import substitution toward export-led strategies, sometimes under pressure from the IMF and World Bank. Political change also mattered: China’s economic opening from 1978, the collapse of the Soviet bloc in 1989–1991 and India’s reforms in 1991 brought billions of workers and consumers into the global economy, and China joined the WTO in 2001.

What role do companies and finance play?

Transnational corporations invest in factories and services abroad (foreign direct investment) and organize global value chains to benefit from low costs, skills and market access. Financial deregulation since the 1970s, after the end of the system of fixed exchange rates, lifted controls on capital flows, and computer trading allows money to move across the world in seconds. This increases investment but also spreads crises, as seen in the Asian financial crisis of 1997 and the global financial crisis of 2008. Migration and the flow of remittances, tourism and the global spread of ideas, media and education also contribute to integration.

The drivers compared

Worked example: costs and openness

The figures are hypothetical and illustrate typical calculations.

1. Transport share of price: a television costs 400 in the shop, and shipping it by container from Asia to Europe costs 4. The transport share is 4 ÷ 400 = 1%. If shipping was 40 in the past (before containers), the share would be 40 ÷ 400 = 10%.
2. Cost reduction: a fall from 40 to 4 is a decrease of 36, or 36 ÷ 40 = 90%.
3. Trade openness: a country has exports of 300 billion and imports of 270 billion, with a GDP of 1,000 billion. Openness = (300 + 270) ÷ 1,000 = 57%.
4. Growth of trade: if world trade rises from 2,000 billion to 8,000 billion in 30 years, it quadruples, and the average growth rate is 4^1/30 − 1 = about 4.7% per year.
5. Tariff reduction: if the average tariff falls from 25% to 5%, a good priced at 100 before tariff falls in the shop from 125 to 105, a drop of 20 ÷ 125 = 16%.
6. Call center savings: a company moves 500 jobs costing 45,000 a year each at home to a country where they cost 12,000. The saving is 500 × (45,000 − 12,000) = 500 × 33,000 = 16,500,000 a year (not counting management and quality costs).

What is the history of globalization?

Economists often describe a first wave of globalization from about 1870 to 1914, driven by steamships, railways, the telegraph and the gold standard, in which trade and migration grew strongly. It was interrupted by the First World War, the Great Depression and the Second World War. After 1945, the Bretton Woods institutions (IMF and World Bank) and GATT began a second wave, which accelerated after 1980 with new technologies and open markets. Since the financial crisis of 2008 and trade tensions, the pandemic and conflicts, the pace of integration of goods trade has slowed in some areas, a phase sometimes called “slowbalization,” while services and data flows continue to grow.

Which mistakes are common?

Mistake 1: Treating globalization as new

Global trade and migration have long histories. What is new is the speed, scale and the breadth of integration of production and finance.

Mistake 2: Crediting only technology or only policy

The drivers reinforce each other. Technology made globalization possible, and policy and political change allowed it to spread.

Mistake 3: Assuming that all countries take part equally

Some regions are closely integrated and others are marginal, so benefits and costs are unevenly spread.

Mistake 4: Believing that globalization is irreversible

Earlier waves were reversed by wars and protectionism. Policies and events can slow or change the pattern.