This article summarises the latest 'Geopolitics and the geometry of global trade' report from the McKinsey Global Institute, which you can read in full here.
The report examines the changing landscape of global trade, amidst different political agendas and supply chain disruption. It highlights the significant role that trade plays in connecting economies worldwide, including those that are geopolitically distant. (The article uses votes on major issues in the UN General Assembly between 2005 and 2022 to judge geopolitical distance.)
It estimates that nearly 20% of global trade is currently completed between geopolitically different parties (McKinsey, 2024). China is the nation which trades across the geopolitical spectrum more than other developed nations.
The document explores recent changes to trading relationships from countries like China, Germany, the UK, and the US. Since 2017, China, Germany, the UK and US have reduced the geopolitical distance of their trade. For Europe this is mostly because of an 80% decline in trade with Russia (McKinsey, 2024). The figure is a 95% decline between the UK and Russia (McKinsey, 2024).
However, the overall volume of international trade by China, Germany, the UK and US has remained constant. Indicating reshoring is yet to happen at scale. Meanwhile, the US appears a bit of an outlier in shifting some of its trade towards geographically closer partners, also known as nearshoring. An approach yet to be seen from others.
It also explores notable shifts in investment patterns, suggesting further changes ahead. Europe’s greenfield investment into China is down 50% on pre-pandemic levels, whereas it has doubled for intra-Europe. Meanwhile, Africa is seeing a marked increase in foreign investment from a variety of nations.
The report explores two potential futures for global trade: one where there is increased fragmentation, i.e. greater geopolitical alignment in trade. Another where we see increased diversification, which reduces the dependence for trade on any single economy and less attention is paid to geopolitics.
The analysis reveals that both scenarios pose a risk to overall long-term growth in GDP. For fragmentations, it’s estimated to be 1.5% down, with some countries potentially suffering a 12% decline. To put that into context, the pandemic had an estimated 5% GDP hit (McKinsey, 2024).
Diversification is estimated to have a reduced impact on the geometry of global trade but would have significant sector-specific consequences. For example, China would lose some of its exports in sectors where it’s extremely dominant but gain in others. Overall economic cost of this approach is expected to be less damaging than fragmentation, hitting the long-term world GDP growth by 0.5% (McKinsey, 2024). However, the report highlights these forecasts are subject to substantial uncertainty.
It concludes by emphasising the importance of preparing for an uncertain trade environment. Gaining a total understanding of how a business leaders’ own firm operates is vital. Remaining informed on world affairs, engaging in crisis and scenario planning, crafting strategic actions in the event of macro events, and building on the business’ ability to navigate them are all essential elements to helping secure success in the decades ahead.
