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Geopolitics and the geometry of global trade: 2025 update
By Jeongmin Seong et al. | McKinsey Global Institute | McKinsey & Company | January 27, 2025
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3 key takeaways from the article
- Every major region relies on imports for more than 25 percent of its consumption of at least one type of critical resource, manufactured good, or service.
- McK analyzes the changing geometry of global goods trade using four measures: trade intensity, geographic distance, geopolitical distance, and import concentration. The pattern of reconfiguration has continued, but its character and pace differ among major economies.
- Trade relationships are continuing to reconfigure, and changing geopolitics is a major reason. The United States has continued to shift trade away from China and toward other economies such as Mexico and Vietnam. In some cases, this is due to these economies forming an intermediate step in trade flows between China and the United States. European economies have moved away from trade with Russia and increased trade with other partners, notably the United States. Developing economies, rather than advanced ones, now account for the majority of China’s imports and exports. Economies such as the Association of Southeast Asian Nations (ASEAN), Brazil, and India continue to strengthen trade ties across the geopolitical spectrum.
(Copyright lies with the publisher)
Topics: Global Trade, USA, Europe, China, ASEAN, Geo-political divide, Geographical Distance and Trade, Trade Intensity
Click for the extractive summary of the articleTrade binds economies around the world. Every major region relies on imports for more than 25 percent of its consumption of at least one type of critical resource, manufactured good, or service. Trade relationships are continuing to reconfigure, and changing geopolitics is a major reason.
Although all economies engage in trade, each has its own distinct trade footprint. McK analyzes the changing geometry of global goods trade using four measures: trade intensity, geographic distance, geopolitical distance, and import concentration. These metrics provide valuable insights into the unique trade characteristics of different economies.
Economies vary in how much they trade in comparison to their size; this is their trade intensity. Economies also vary in their patterns of trade partners in both where they are, or geographic distance, and how aligned they are on global issues, or geopolitical distance. Finally, economies differ in how broad or narrow their network of supply relationships is, or their import concentration.
Goods trade intensity in ASEAN and Germany is higher because of their integration in cross-border manufacturing value chains. The goods trade intensity of the United States is lower than that of many other large economies due in part to its large domestic economy and natural endowments. Brazil’s trade travels farther geographically than that of many economies because of its significant trade with China. Germany and the United Kingdom tend to trade over shorter geographic distances than other major trading economies, reflecting the relatively compact nature of Europe’s economies. China’s relatively high geopolitical distance of trade is driven by its extensive trade with Australia, the EU, Japan, South Korea, and the United States. Germany and the United Kingdom trade over shorter geopolitical distances because of their high share of trade with geopolitically proximate European economies. Overall, large economies tend to have lower levels of import concentration than the global average. Germany’s import concentration is relatively low, reflecting extensive intra-European trade. Brazil’s is higher because of significant imports from China.
Taken together, these shifts suggest that a new trade dynamic is emerging between China and the United States, with ASEAN economies becoming increasingly integrated as intermediate steps in the global value chains that link the two largest economies. This is one of the reasons the US trade shift away from China is much smaller in value-added terms than in the import and export trade data. Broadly, China adds value to a product that is exported to ASEAN, and China’s value added is therefore embedded in the goods that ASEAN exports to the United States.
The ongoing shifts in global trade are one part of the evolving geopolitical landscape of which organizations are well aware, and they are now crafting strategies accordingly. It makes sense for organizations to monitor changes in the geometry of trade, such as trends in geopolitical distance, as part of their response. This response can also include understanding the implications of potential trade tariffs and the strategic opportunities they may provide. Organizations can also be proactive in attempts to accelerate growth, optimize business operations, and build capabilities and strategies to help them respond to geopolitical disruption, for instance through structural segmentation. The shifting geopolitical geometry may create risks, but carefully navigating it may deliver opportunities, too.
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