Geopolitics and the geometry of global trade
Global trade patterns are reconfiguring. More shifts are likely and businesses need to be aware of the potential trade-offs of different paths ahead.
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.
Introduction
Trade reconfiguration has been making headlines. In 2023, Mexico became the United States’ largest goods trade partner. Vietnam’s trade with China and the United States has been surging. European economies’ energy imports shifted dramatically away from Russia, while imports of some products from China, such as electric vehicles, boomed.
Along with such headlines, a new lexicon has emerged among policy makers and business leaders. Use of terms such as “decoupling,” “derisking,” “reshoring,” “nearshoring,” and “friendshoring” in corporate presentations increased more than 20-fold between 2018 and 2022. The subtext of these terms is often geopolitical, which is increasingly a feature of talk about trade. Average tariffs on goods trade between China and the United States have increased between three- and sixfold since 2017. Following Russia’s invasion of Ukraine, the European Union (EU), the United States, and many other players imposed sanctions. A large majority of companies from Europe, Japan, and the United States withdrew or curtailed operations in Russia. The rerouting of shipping lanes due to the Red Sea crisis that started in December 2023 not only incurs additional costs, delays, and security complexities but also has the potential to create far-reaching shock waves beyond the immediate locations affected. More broadly, the number of new global trade restrictions each year has been steadily increasing, from about 650 new restrictions in 2017 to more than 3,000 in 2023.
