Political Limits to Globalization1

We live in an unprecedented age of globalization, where technology, ideas, factors of production and goods are increasingly mobile across national boundaries. The current wave of globalization is distinguished from previous ones in part because of the major role of information technology. Nevertheless, globalization is not irreversible. Openness to international trade, …nance and technology is a choice that countries make, and despite the facilitating role of information technology, many countries, even many leading players in the world economy including the United States, China, India, Brazil and Russia, could decide to close their borders. A major cause of the end of the previous (also historically unprecedented) 19th century wave of globalization was disillusionment with the international economic order, in large part precipitated by the Great Depression (e.g., Harold James, 2001). Another, somewhat less emphasized though not necessarily less important cause was the rise of nationalism, militarism and international con‡ict (e.g., Ronald Findlay and Kevin H. O’Rourke, 2007, Reuven Glick and Alan M. Taylor, 2006).2 The previous wave of globalization took place in the context of the 100 years following the end of Napoleonic wars, which were unusually peaceful for European powers; it came to an end following the most widespread con‡ict that human society had experienced until then, World War I. In this paper, we emphasize that globalization, which depends on political decisions of nation states, has political limits, and that these limits are related to nationalism and militarism. Despite the increasing reach of globalization, anecdotal evidence suggests that nationalism and militarism are strong around the world, in countries ranging from the United States to China, Russia and India (e.g., Robert Kagan, 2008). To go beyond anecdotal evidence, in this paper we proxy nationalist and militarist sentiments by military spending.3 In addition to being a useful proxy, military spending might itself impact trade, for example, because it contributes to tensions or leads to skirmishes between countries. Figure 1 shows the evolution of world trade and total military spending between 1988 and 2007. It depicts the steady rise of trade over the past two decades,