McKinsey: Economies are trading more with geopolitical allies and less with rivals

A new report from the McKinsey Global Institute finds that geopolitical tensions are reshaping global trade patterns, with the United States and China at the center of this reorientation. The analysis, based on trade data through 2024, shows that economies are trading more with geopolitical allies and less with rivals.

The report cites ongoing US-China trade tensions and Russia's invasion of Ukraine as key drivers of the trend. “The most significant ongoing shift in trade patterns is a fall in the average geopolitical distance of trade,” the authors note. This index fell by about 7% between 2017 and 2024, reflecting a decline in trade between economies at opposite ends of the geopolitical spectrum.

The key metric that allowed McKinsey to conduct this analysis in a rigorous and quantitative manner is its concept of “geopolitical position,” which the report says is calculated using principal components analysis of United Nations General Assembly voting records from 2005 to 2022. Voting records allow McKinsey to assign a geopolitical standing score to each country and thereby calculate their geopolitical distance from each other.

(Source: McKinsey Global Institute)

The United States has been at the forefront of this reorientation, continuing to diversify away from China as a trading partner. From 2017 to 2024, the United States reduced its share of goods trade with China by 6 percentage points. At the same time, the United States increased its imports from Mexico and the Association of Southeast Asian Nations (ASEAN) countries by about 2 and 4 percentage points, respectively.

This shift is particularly pronounced in sectors such as electronics, machinery, and textiles. In these sectors, China’s share of US imports fell by 14 to 16 percentage points over the period. As a result, Mexico is set to overtake China as the largest supplier of goods to the United States in 2023, a position China has held since 2007.

However, the report cautions that the shift away from direct US-China trade could be partly offset by indirect connections. For example, while US imports from ASEAN countries have increased sharply, many of these goods still contain significant Chinese value-added content. The report notes that “about 25 percent of the value of Vietnam’s electronics exports represented value added originally in China” in 2023, up from 10% in 2015.

On the Chinese side, trade is increasingly skewed toward developing economies, particularly ASEAN countries, Latin America, and Russia. By 2024, developing economies will account for the majority of China’s imports and exports, surpassing the 30-nation European bloc.

Trade between China and Latin America is also growing rapidly, driven by agricultural imports and exports of manufactured goods such as consumer electronics and clean technology products. For example, trade between Brazil and China is expected to grow by about 13% annually from 2017 to 2024.

The report highlights that Russia has become an increasingly important trading partner for China following Western sanctions. Russia has emerged as a growing source of energy resources for China and a major destination for Chinese automobiles and transport equipment. The share of Chinese transport equipment exports to Russia jumped from 2% in 2017 to more than 10% in 2024.

For US companies, these changing trade patterns could have significant implications for supply chains across many industries. The report suggests that companies may need to navigate a more complex network of suppliers and intermediaries as direct trade between the US and China declines. Industries such as electronics and textiles, which have seen the largest shift away from Chinese imports, may face particular challenges in restructuring their supply chains.

The authors note that “shifting the fundamental geography of import dependence happens slowly.” While gross import figures show a sharp decline in US dependence on Chinese goods, the change in value-added terms has been less dramatic. This suggests that many US supply chains still have significant indirect exposure to China, even as direct imports decline.

Despite these challenges, the report also points to potential opportunities for U.S. companies. Growing U.S. trade relationships with Mexico and ASEAN countries could provide new supply options and export markets. Additionally, the U.S. has gained market share in some European markets, particularly in energy exports to the EU.

McKinsey analysts concluded that while the changing geopolitical geometry of trade creates risks, “carefully navigating it may deliver opportunities, too.” They advise organizations to closely monitor changes in trade patterns and develop strategies to respond to geopolitical disruptions.

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Source: Phaata.com (According to McKinsey Global Institute / Freightwaves ) 

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