Geopolitics and the geometry of global trade

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Geopolitics and the geometry of global trade

By Jeongmin Seong et al., | McKinsey & Company | January 17, 2024

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The recent report on geopolitics and the geometry of global trade published by McKinsey offers analysis of the changing geometry of global goods trade using four measures, each of which has its own limitations: trade intensity, geographic distance, import concentration, and a new measure of “geopolitical distance.” This new measure is the geopolitical analog of geographic distance. It is an imperfect approximation of how geopolitical alignment relates to trade, constructed by looking at UN General Assembly voting records.  The report offers the following at a glance:

Trade in concentrated products binds geopolitically distant economies. Trade between geopolitically distant economies accounts for nearly 20 percent of global goods trade but close to 40 percent of trade in globally concentrated products—products such as laptops and iron ore for which three or fewer economies provide at least 90 percent of global exports.

Trade reconfiguration is under way. Since 2017, China, Germany, the United Kingdom, and the United States have reduced the geopolitical distance of their trade by 4 to 10 percent each. The United States has also reduced the geographic distance and diversified the origins of its trade. Meanwhile, economies of the Association of Southeast Asian Nations, Brazil, and India are trading more both across the geopolitical spectrum and over longer distances.

Increased investment into a range of developing economies suggests further trade reconfiguration in coming years. While roughly 60 percent of greenfield investment has flowed to developing economies since 2010, its destination is shifting. The largest leaps in the past two years were in Africa and India, while announced investment into China and Russia fell by about 70 and 98 percent, respectively, compared with prepandemic averages.

The future of global trade will involve trade-offs—reducing geopolitical distance comes with increasing trade concentration, and vice versa. We explore two types of reconfiguration. In one, economies shift their trade to more geopolitically aligned partners. As a byproduct, average trade concentration increases by 13 percent and economic growth suffers. In the other, trade relationships diversify so that no economy is highly dependent on another, but as a consequence, the geopolitical distance of trade increases by 3 percent. The degree of trade-off varies significantly across individual economies.

Business leaders need to position their organizations for uncertainty. This positioning can involve cultivating an insights edge, anticipating and adapting with scenario planning, developing a portfolio of strategic actions, and building geopolitical muscle. Businesses can also embrace cooperation to contribute to, and help shape, the discourse on the evolution of global connections.

3 key takeaways from the article

1. The recent report on geopolitics and the geometry of global trade published by McKinsey offers analysis of the changing geometry of global goods trade using four measures, each of which has its own limitations: trade intensity, geographic distance, import concentration, and a new measure of “geopolitical distance.”
2. The report reveals the following interestings insights.  Trade in concentrated products such as laoptops binds geopolitically distant economies. Reconfiguration is under way that countries have reduced the geopolitical distance of their trade and in some cases diversified the origins of their trade.  Increased investment into a range of developing economies suggests further trade reconfiguration in coming years.  The future of global trade will involve trade-offs—reducing geopolitical distance comes with increasing trade concentration, and vice versa. 
3. Business leaders need to position their organizations for uncertainty. This positioning can involve cultivating an insights edge, anticipating and adapting with scenario planning, developing a portfolio of strategic actions, and building geopolitical muscle. Businesses can also embrace cooperation to contribute to, and help shape, the discourse on the evolution of global connections.

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Topics:  Global Trade, Global Economies, Investment