What is the Spillover Effect?
The spillover effect refers to the influence that seemingly unrelated events in one country can have on the economies of other nations. Although there are positive spillover effects, the term is most commonly applied to the negative impacts that domestic events such as earthquakes, stock market crises, or other macro-economic disruptions can have worldwide.
How the Spillover Effect Works
Spillover effects are a specialized type of network effect that has amplified with globalization, deepening financial ties across countries. For instance, the trade relationship between Canada and the U.S. exemplifies this phenomenon. The U.S. is Canada’s main market in nearly every export-oriented sector, thus a minor slowdown in the U.S. can have magnified effects on the Canadian economy.
Consider the case when consumer spending in the United States declines; this slowdown impacts economies heavily reliant on the U.S. as their primary export market. Larger economies like the U.S. and China produce higher spillover effects given their roles as leaders in the global economy. Most nations feel significant repercussions when these two economic giants face downturns or experience macroeconomic turbulence.
Since 2009, China has also become a major source of spillover effects. Chinese manufacturers have driven much of the global demand for commodities since 2000. Nowadays, a downturn in China’s economy palpably impacts global trade in metals, energy, grains, and other commodities. Eastern Europe, the Middle East, and Africa notably suffer as they rely on China for a significant share of their revenue.
Special Considerations
Unconnected Economies
Few countries experience minimal spillover effects due to isolation from the global market. However, these closed-off economies are becoming rarer. Even a highly insulated economy like North Korea has begun to feel the effects of China’s economic fluctuations.
Safe-Haven Economies
Some developed economies such as Japan, the U.S., and the Eurozone can counterweight spillover effects through investment safety nets. When worldwide markets become unstable, investors flock to these safe havens. For instance, during the European Union’s struggles with the Greek debt crisis in 2015, the U.S. saw an influx of investment inflows. This resulted in reduced Treasury yields and borrowing costs, reflecting a positive spillover effect from the perspective of U.S. consumers.
Key Takeaways
- The spillover effect occurs when events in one country ripple through to the economies of other, often more dependent, nations.
- Market downturns like the Great Recession of 2008 and natural disasters such as the Fukushima disaster in 2011 are typical sources of spillover effects.
Related Terms: network effect, consumer spending, commodity market, safe haven, trade relationship extr_NEG
