written by: Tomislav Brezinščak, McKinsey
For some time now, we have been monitoring the state of global trade in our research at McKinsey, and we can conclude that it is reshaping, with the trend being that countries and companies are increasingly choosing to do business with partners who are geopolitically closer to them. For instance, a study titled ‘Geopolitics and the Geometry of Global Trade’ has shown that this has been particularly evident since 2017, when it became clear that countries are trading less with those who are geopolitically distant, and the latest news on tariffs, trade rules, and industrial policy only further raises the level of uncertainty. All business leaders with whom McKinsey employees spoke said the same: today’s trading environment is the most uncertain they have experienced in their careers.
Three Scenarios
In an effort to predict the direction in which global trade will move in the upcoming period, we have developed three most likely scenarios: baseline, diversification, and fragmentation. In the baseline scenario, global trade could grow by about $12 trillion, or 35%, by 2035, totaling $45 trillion. However, if, according to the diversification scenario, companies begin to seek entirely new suppliers, a billion of that growth could disappear, and total growth could decrease by up to $3 trillion if the fragmentation scenario occurs, in which geopolitically distant economies reduce their mutual trade.
Our research ‘New Trade Paradigm: How Changes in Trade Directions Could Impact Business’ has shown that, depending on the scenario, more than 30% of global trade could be redirected from one trade direction to another by 2035. The most significant changes, as expected, would come from the fragmentation scenario, driven by higher tariffs, while trade routes between developing markets could be among the most stable: of the fifty largest current trade routes, sixteen would grow strongly even in the fragmentation scenario, while nine (mostly those connecting developed countries with China and Russia) would sharply decline.
Looking by sectors, the most significant changes would occur in electronics trade, as this chain often connects geopolitically distant economies, making it the most vulnerable. When discussing global trade, most people first think of containers and ships full of goods, but countries exchange much more than that, and moreover, flows related to knowledge and expertise are growing the fastest. Research on ‘Global Flows: The Connecting Tissue of an Interconnected World’ has shown that trade in intangible goods, such as services and intellectual property, grew about twice as fast as trade in goods between 2010 and 2019. In the case of intangible flows, barriers are often not tariffs but regulatory restrictions, licensing requirements, and the like. If fragmentation occurs in this area, differing regulations and the relocation of client businesses can seriously complicate service provision.
