Is globalization still inevitable? For more than a generation the world's economy has been on a seemingly inexorable march toward tighter economic, political, and social alignment as people, goods, and capital became ever more mobile. Yet even before the September 11 terror attacks on the United States, a backlash was brewing against globalization's dislocating effects, even among some who understand the benefits of trade and investment. The terror attacks and their aftermath, replete with the specter of a long-running conflict between Islamic fundamentalism and the modern economy, quickly sparked a rethinking of convictions about globalization's forward momentum.

Executives plotting their companies' strategies on this unforeseen landscape may well have to recalculate the speed and direction of trade and economic liberalization. And they will certainly have to factor in new costs, barriers, and uncertainties. But they should also take reassurance from the fact that the fundamental forces that helped globalization take firm root and grow will secure its progress, through this crisis and beyond.

Globalization sounds clinical, yet in the final analysis it is about the impulses of institutions and people. It is about the desire of companies to earn profits. The choices savers seek to earn a high return on their assets. The decision a consumer makes to buy a Mercedes rather than a Cadillac. Or to buy a Big Mac. Unless people live in North Korea or Cuba (and even in such isolated corners of the global economy the question is not really about whether change will come, but rather when), consumers and business leaders will continue to be exposed to new products and best practices from other countries and cultures. The pressure of demand from consumers and the pressure of unexploited profit opportunities will always wear away at barriers to globalization and the spread of new ideas.

Mutually assured growth

During the 1990s, after the Cold War's bipolar ideological conflict gave way to broad economic competition, increasingly low-cost technology created enormous profit potential for companies entering new markets. So did the practice of applying successful business systems outside their home markets. McDonald's, for example, began the decade with about 3,000 overseas restaurants but ended it with nearly 15,000—surpassing even its count of domestic US restaurants. No company, it seemed, could resist tapping the opportunities from global expansion.

Companies with a strong competitive advantage will continue to benefit by exploiting their advantage worldwide. International comparisons carried out by the McKinsey Global Institute have suggested that an important contributor to higher levels of productivity is global competition against best practice companies, which increases the intensity of competition and forces companies to innovate or be driven out rather than hunker down in protected local markets. In turn, technology development depends on finding global markets to justify the risky investments required.

Globalization has also contributed to economic growth more broadly as relationships among economies grew. Key to the US economy's extraordinary economic performance in the 1990s were openness, mobility, and the benefits of globalization, factors that were to some degree adopted by regional economies everywhere. Most economists believe that the US economy, now in a period of cyclical weakness, will make a strong recovery, and the same dynamism that accelerated globalization in the 1990s will still be strong in the next decade. Technology will continue to pierce borders, support trade among people, and offer economic choices that keep globalization advancing.

Bumps in the road

This isn't the first time globalization's momentum has been challenged. Financial crises in Asia, Latin America, and the former Soviet bloc during the late 1990s, for example, exposed structural weaknesses that shook world markets, exposed vast instabilities, and called into question beliefs about the durability of globalization approaches like Asia's "forced march" industrialization.

Of course, the imponderables are quite different in a conflict where cruise missiles, commercial airliners, and postal envelopes can assume a horrifying lethal equivalence. In the short run, at least, the conflict will slow the pace of globalization and influence the tactics that companies will implement to cope.

For one, consider that a major thrust of US and Western foreign policy has been to encourage economic liberalization, pushing globalization forward. With the focus now on fighting terrorism, it will simply be harder for institutions such as the International Monetary Fund and the World Trade Organization to pressure governments to liberalize. Many of those governments will now be in position to use their role as a political and military coalition partner with the United States to bow to local protectionist interests and resist. Obstacles to globalization will break down more slowly, even in the United States and Europe.

The very nature of globalization will also change. Various financial crises had already altered the growth prospects and relative attractiveness of different regions, but selecting the right markets for expansion has become even more important. Having a strong global brand, especially a strong American brand, is suddenly less attractive. As brands, Coke and Big Mac are still massively valuable, but the future may involve more alliances and increased effort to preserve local brand identities. Understanding and managing political constraints always was important; it is now even more so.

The terrorist attacks will have more concrete effects as well, the most significant being an increase in uncertainty and risk. Insurance premiums have never reflected the possibility, for example, that airlines and skyscrapers might be destroyed by terrorists. Now they do. One of the problems in getting the economy running smoothly again is that insurance premiums have soared, particularly for airlines. And the insurance against terrorist attacks will not go away for a while, if ever, so it will be a bit more costly to fly and run airports. Even with government help in disaster insurance coverage, it will be less attractive to invest in tall towers or visible attractions easily identifiable as American.

The probability of default on high-yield debt has also sharply increased in many industries. The beleaguered telecom industry aside, the trend is notable in aerospace, services, and nondurable consumer goods. Blue-chip corporations also now face higher premiums on borrowing costs, paying 2.5 percentage points above Treasury rates, compared to 2.15 percentage points prior to the attacks and 1.25 percentage points in 1999. While most of the rise in the risk premium was in the market prior to September 11, the attacks have made things a bit worse. This rise in the risk premium affects all borrowing but at the margin is likely to have its largest impact on funding for global investments.

Then there is the certainty of a higher "security tax." It was known for some time that security at US airports was dreadful, but no one really believed it would matter, at least not on the scale of September 11, and no one wanted to pay the bill for a better system. Now we know better. Yet the issue of security extends well beyond the airline sector. Private companies will have to strengthen security. Executives may wait longer for visas, and their travel may be otherwise impeded. Manufacturers will have to hold larger inventories as trucks endure longer waits to enter the United States from Canada and Mexico.

Yet these new barriers can be overcome. Most of the increase in borrowing costs was the result of the economic downturn, not directly related to the attacks. A strong economic recovery should bring borrowing costs back to normal or close to it. On the security side, innovation and the benefits of widespread use will bring costs down as well. As with air bags, introduced with a high cost per bag, many people will complain about paying a "safety tax." Today mass production has sharply lowered the cost, and people buy cars with multiple air bags. Best practice approaches to security will emerge and address many of today's issues, with only a slight cost to productivity.

Most important, the future of globalization will depend more heavily than before upon the willingness of populations and policy makers around the world to embrace it. The impulse to turn inward will have greater appeal, threatening to restrict the flow of capital and people and slowing not only the pace of globalization but also the pace of economic growth. But the countervailing force of consumers and companies lined up behind the inherent freedom of choice it offers will prove too powerful to resist, ensuring that the vital opening of the global economy continues.