Geopolitics and the geometry of global trade

The following excerpt is republished with the permission of the McKinsey Global Institute from its report Geopolitics and the geometry of global trade, published on 17 January 2024.

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.

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