The great trade rearrangement

Tariffs have surged into the public spotlight. On April 2, 2025, the United States unveiled country-specific tariffs, defined by a formula based on goods trade deficits. Tariffs have substantially receded from those highs since and may continue to shift in the coming weeks and months as negotiations and court challenges unfold.

Yet substantial trade tensions between the United States and China could be here to stay.1 When combined with prior policy measures, tariffs and geopolitics clearly correspond: economies that are more “geopolitically distant” from the United States, particularly China, tend to face the highest tariffs. If current settings persist, US imports may shift from China to countries that face lower tariffs and historically have been more geopolitically aligned with the United States.

Even before 2025, the geometry of trade had been shifting along geopolitical lines. The average geopolitical distance of global goods started to compress beginning around 2018, particularly for the United States and China—evidence of so-called friendshoring.  

Recent events may accelerate this realignment. Many US firms are urgently considering alternative sources of supply. Without a shift to different sources, prices may rise, and US companies and consumers might need to reduce—making do with fewer products or inputs—or replace, substituting one product for another sufficiently similar one. The higher the tariffs, the more significant the potential reduction or replacement.

An alternative is to ramp up existing US manufacturing capabilities (cars) and rebuild dormant ones (chips and ships). This change could happen in other countries, too. But it takes time, money, and know-how. And at least in the case of the United States, where wages are high, it may not be economically viable in some sectors.

The authors introduce a “rearrangement ratio” to quantify how hard the change might be. Thirty-five percent of US imports from China have a ratio less than 0.1, signifying a global available export market ten times larger than current US imports from China—think T-shirts or logic chips. For higher ratios, rearrangement becomes harder, and for the 5 percent of trade with a ratio greater than 1.0—for example, rare earth magnets—US imports from China exceed available global exports.

Consumer goods are harder to rearrange than business inputs. Sixty-one percent of business input imports have a rearrangement ratio less than 0.1, versus 16 percent of consumer goods. Major products like laptops, smartphones, and toys are harder to rearrange.

Europe emerges as the fulcrum of trade rearrangement. Across nine varied simulations, European imports from China and exports to the United States both go up by nearly $200 billion. As intra-European trade shifts to the United States, it leaves holes filled by increased Chinese exports—assuming Europe does not choose to alter its own trade policies. Others will be affected, too: exports to the United States from as many as 70 countries may increase by more than 10 percent.

Prepare for resilience in a reordering world. Strategies will need to handle continued uncertainty and ongoing shifts. Customers will buy new things from new sources and use them in new ways. 

Specifics matter. Shifts may look very different across the many thousands of products that make up the global web of trade. When making strategic decisions for their organizations, leaders should examine fine-grained product market dynamics to understand where there may be surpluses or shortages, price sensitivity or rigidity, and granular pockets of decline or growth.

Trade rearrangement promises to reshape the geometry of global trade, setting the backdrop as firms build resilience in a reordering world.

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