Fourth Industrial Revolution

Globalization has gone digital – this is how to compete

An Albanian holds up a U.S. flag as President George W. Bush's motorcade passes through central Tirana central Tirana June 10, 2007. Bush said on Sunday the United Nations should grant independence quickly to the breakaway Serbian province of Kosovo, and if Russia continued to block it the West would act.

Globalization is entering a new digital era, and the US is in a position of strength. Image: REUTERS/Damir Sagolj

Martin Baily
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American voters are angry. But while the ill effects of globalization top their list of grievances, nobody is well served when complex economic issues are reduced to bumper-sticker slogans – as they have been thus far in the presidential campaign.

It is unfair to dismiss concerns about globalization as unfounded. America deserves to have an honest debate about its effects. In order to yield constructive solutions, however, all sides will need to concede some inconvenient truths – and to recognize that globalization is not the same phenomenon it was 20 years ago.

Protectionists fail to see how the United States’ eroding industrial base is compatible with the principle that globalization boosts growth. But the evidence supporting that principle is too substantial to ignore.

Recent research by the McKinsey Global Institute (MGI) echoes the findings of other academics: global flows of goods, foreign direct investment, and data have increased global GDP by roughly 10% compared to what it would have been had those flows never occurred. The extra value provided by globalization amounted to $7.8 trillion in 2014 alone.

And yet, the shuttered factories dotting America’s Midwestern “Rust Belt” are real. Even as globalization generates aggregate growth, it produces winners and losers. Exposing local industries to international competition spurs efficiency and innovation, but the resulting creative destruction exacts a substantial toll on families and communities.

Economists and policymakers alike are guilty of glossing over these distributional consequences. Countries that engage in free trade will find new channels for growth in the long run, the thinking goes, and workers who lose their jobs in one industry will find employment in another.

 Global flows of trade and finance
Image: Mckinsey

In the real world, however, this process is messy and protracted. Workers in a shrinking industry may need entirely new skills to find jobs in other sectors, and they may have to pack up their families and pull up deep roots to pursue these opportunities. It has taken a popular backlash against free trade for policymakers and the media to acknowledge the extent of this disruption.

That backlash should not have come as a surprise. Traditional labor-market policies and training systems have not been equal to the task of dealing with the large-scale changes caused by the twin forces of globalization and automation. The US needs concrete proposals for supporting workers caught up in structural transitions – and a willingness to consider fresh approaches, such as wage insurance.

Contrary to campaign rhetoric, simple protectionism would harm consumers. A recentstudy by the US President’s Council of Economic Advisers found that middle-class Americans gain more than a quarter of their purchasing power from trade. In any event, imposing tariffs on foreign goods will not bring back lost manufacturing jobs.

It is time to change the parameters of the debate and recognize that globalization has become an entirely different animal: The global goods trade has flattened for a variety of reasons, including plummeting commodity prices, sluggishness in many major economies, and a trend toward producing goods closer to the point of consumption. Cross-border flows of data, by contrast, have grown by a factor of 45 during the past decade, and now generate a greater economic impact than flows of traditional manufactured goods.

Digitization is changing everything: the nature of the goods changing hands, the universe of potential suppliers and customers, the method of delivery, and the capital and scale required to operate globally. It also means that globalization is no longer exclusively the domain of Fortune 500 firms.

Companies interacting with their foreign operations, suppliers, and customers account for a large and growing share of global Internet traffic. Already half of the world’s traded services are digitized, and 12% of the global goods trade is conducted via international e-commerce. E-commerce marketplaces such as Alibaba, Amazon, and eBay are turning millions of small enterprises into exporters. This remains an enormous untapped opportunity for the US, where fewer than 1% of companies export – a far lower share than in any other advanced economy.

Despite all the anti-trade rhetoric, it is crucial that Americans bear in mind that most of the world’s customers are overseas. Fast-growing emerging economies will be the biggest sources of consumption growth in the years ahead.

This would be the worst possible moment to erect barriers. The new digital landscape is still taking shape, and countries have an opportunity to redefine their comparative advantages. The US may have lost out as the world chased low labor costs; but it operates from a position of strength in a world defined by digital globalization.

There is real value in the seamless movement of innovation, information, goods, services, and – yes – people. As the US struggles to jump-start its economy, it cannot afford to seal itself off from an important source of growth.

US policymakers must take a nuanced, clear-eyed view of globalization, one that addresses its downsides more effectively, not only when it comes to lost jobs at home, but also when it comes to its trading partners’ labor and environmental standards. Above all, the US needs to stop retrying the past – and start focusing on how it can compete in the next era of globalization.

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