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Spillover Effect

Reviewed by Sweta | Updated on Sep 30, 2020

Catalogue

Introduction

The spillover effect refers to the effect on the economy of a country from unrelated events happening in another country. Events, including natural calamities, such as earthquakes or political crisis in another country can have positive or negative effects on the economy of a country.

Understanding Spillover Effect

The spillover effect is related to the effects of globalisation, international trade, and interconnected financial markets between different economies of the world.

An example of the spillover effect is the US-China trade war. China had been the second-largest trade partner of the US, after Canada. The interdependency of US-China trade increased over a period of time.

However, the US imposed heavy tariffs on Chinese goods since early 2018. China retaliated by imposing tariffs on US-made products, thus resulting in a trade war between the two largest economies of the world.

The US-China trade war has had spillover, both negative and positive spillover effects, on various economies of the world. The effects have been felt in many Asian economies.

While Japan’s economy has significantly gained in terms of better trade relations with China, the global industry demand has been low, especially for the commodity and metals sector.

The trade war is in its third year and has harmed the economies of both the US and China while creating uncertainty for global trade and slowing global economic growth. The trade war is an example of a significant event between two countries affecting various countries and global trade.

A slowing Chinese economy has had a negative impact on global trade in energy, crude oil, metals and other industrial commodities. In the case of global spillover effects, investors typically return back to their home markets or safe havens.

Conclusion

The spillover effect has more negative effects than positive effects. In a global economy where financial markets are quite interconnected, spillover can lead to a global crash in financial markets eroding investor wealth and dipping business confidence.

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