Trade Dynamics in Flux: Navigating the Shifting Global Trade System
As the global trade system undergoes significant upheaval, businesses must adapt to the changing landscape to stay competitive. The uncertainty brought about by tariffs, trade tensions, and geopolitical shifts requires a strategic approach to navigate the evolving trade corridors and sector-specific challenges.
At a Glance
- The global trade system is in flux. Since 2017, economies have traded less with geopolitically distant partners. Recent announcements on tariffs, trade, and industrial policy have deepened uncertainty.
- Trade will grow by $12 trillion by 2035 in a baseline scenario. The trade increase would boost today’s global trade value by about 35 percent, to $45 trillion. In a diversification scenario (in which companies seek new sources of supply), about $1 trillion of that growth might not be realized. In a fragmentation scenario (in which geopolitically distant economies trade less), about $3 trillion of it could be lost.
- Depending on the scenario, over 30 percent of global trade in 2035 could swing from one trade corridor to another. That swing is the sum of the differences between the highest and lowest corridor-level values across the scenarios we examine. Fragmentation, pushed by heightened tariff levels, could drive the largest shifts, especially in critical sectors.
- Trade corridors between emerging economies could be among the safest bets. Of today’s 50 largest corridors, 16 would grow strongly, even in a fragmentation scenario, while nine corridors—primarily linking advanced economies to China and Russia—would shrink sharply. The rest fall somewhere in the middle.
- Trade in electronics could see the biggest shifts, followed by textiles and machinery. These manufacturing value chains bridge geopolitically distant economies, so they’re more susceptible than others to fragmentation. Resources across energy and mining could see substantial downstream effects.
- Businesses can get ahead of changing trade dynamics. By understanding potential scenarios and then establishing value creation theses to guide actions, firms can drive strategic and organizational changes to capture new opportunities, as well as to buffer against a downside.
Geopolitical Distance and Trade Corridors
Secular changes in trade patterns can be detected through shifts in trade corridors—the connections between countries to exchange goods, services, and resources. Our research finds that in a baseline scenario with tariffs at recent historical levels, global trade of goods, services, and resources would grow by about $12 trillion in real terms to $45 trillion by 2035, up from $33 trillion in 2024.
We also examine two out of many possible scenarios, both intended to bound uncertainty rather than to describe a precise future. In a fragmentation scenario, trade relationships deteriorate, and tariffs on most goods rise to 10 percent, with tariffs on critical goods traded between many advanced economies and China and Russia rising by up to 60 percent. Should that scenario unfold, about $3 trillion of the nearly $12 trillion in growth would be lost. On the other hand, in a diversification scenario, in which businesses prize resilience and diversify their suppliers, about $1 trillion in potential trade growth would be foregone.
Trade Growth by Corridor
Today, the global trade system sits at the cusp of even more change. Patterns of growth through 2035 across scenarios and geographies differ markedly. In the baseline scenario, trade corridors connecting emerging markets with each other and China would grow at 4 to 5 percent annually on average over the next decade, outpacing the global average growth. This higher growth would spring from underlying faster economic growth in these markets and their potential for additional integration as both markets and suppliers of the Chinese economy. On the other hand, the currently much larger corridors running to and from advanced economies would generally grow more slowly, about 2 percent per year.
Sector-Specific Strategies
Every sector has distinct characteristics that will produce different dynamics in every scenario. Electronics, textiles, machinery, pharmaceuticals, and transport equipment are among the industries that could be most affected by geopolitical dynamics and trade shifts. For example, the electronics sector, with its high exposure to shifts in global trade dynamics, faces challenges due to its reliance on geopolitically distant partners and concentrated supply chains.
Strategic Positions for Multinationals
Safe bets, cautious bets, and uncertain bets in trade corridors signify the varying levels of risk and opportunity for businesses. Safe bets include corridors connecting China to emerging economies, intraregional corridors in emerging markets, and corridors from Europe to geopolitically close advanced economies. Cautious bets involve corridors connecting emerging economies with advanced economies and deep corridors with lower baseline growth rates. Uncertain bets include corridors that shrink materially in at least one scenario we consider, particularly those connecting geopolitically distant economies with advanced economies.
How Businesses Can Get Ahead of Changing Dynamics
Businesses can shape a coherent response to trade shifts by thinking through key questions: the impact on the current business, the importance of trade corridors, the value creation potential of these corridors, the business’s current position, and the strategic and organizational changes needed to support action plans. By understanding the evolving trade dynamics and sector-specific challenges, companies can proactively navigate the shifting global trade system.
FAQ
What are the key factors driving the changes in global trade dynamics?
The changes in global trade dynamics are driven by geopolitical tensions, tariff hikes, shifts in supply chains, and the impact of diversification and fragmentation scenarios on trade corridors.
How can businesses adapt to the evolving trade landscape?
Businesses can adapt by analyzing the impact of trade shifts on their operations, identifying key trade corridors for future growth, and implementing strategic changes to capitalize on new opportunities and mitigate risks.
What role do sector-specific strategies play in navigating trade shifts?
Sector-specific strategies are essential for understanding the unique challenges and opportunities facing different industries in the context of changing trade dynamics. By tailoring their approach to sector-specific trends, businesses can position themselves for success in a volatile trade environment.
Conclusion
As the global trade system continues to undergo significant flux, businesses must proactively adapt to the changing landscape to stay competitive. By analyzing trade corridors, sector-specific challenges, and strategic positions, companies can navigate the evolving dynamics and seize new opportunities in a rapidly changing global trade environment.
