As geopolitical tensions persist, global trade dynamics are becoming increasingly complex—and many leaders find themselves on tenterhooks. On this episode of The McKinsey Podcast, Cindy Levy and Shubham Singhal, two global coleaders of McKinsey’s geopolitics work, join Global Editorial Director Lucia Rahilly to discuss how to move forward amid rapidly reconfiguring trade relationships—regardless of the way current tariff talks play out.

This conversation has been adapted from our McKinsey Live series.

The McKinsey Podcast is cohosted by Lucia Rahilly and Roberta Fusaro.

The following transcript has been edited for clarity and length.

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Roberta Fusaro: Check out our recent report about how to win the right battles for consumer attention. Just to make things trickier, not only is it tough to earn people’s focus, but consumer behavior is a little confusing these days. Understanding what’s motivating consumers to spend is the focus of our recently published State of the Consumer report.

Getting a handle on trade unpredictability

Lucia Rahilly: The tariff landscape remains dynamic and uncertain. Cindy, what do we need to know about where we are now and what’s likely to happen in coming weeks?

Cindy Levy: It has been an eventful number of months, and we’re doing our best to keep on top of developments. The announcements in mid-April took us from a 2 percent weighted average tariff rate on goods into the US to one of 20 to 25 percent, before assuming any reversal of the reciprocal tariffs. If you look at all manufactured goods purchased in the US, about 37 percent are imported. This creates a big knock-on effect on US manufacturing purchases.

There are developments since April that are important to understand. Some are in the industrial space, and some are still in the policy space. The first is that many global companies are seriously evaluating increasing their manufacturing in the US. Many are also saying, “I need to pause. I can’t make major capital decisions right now because the environment is too uncertain.”

Another development is that China and the US agreed to a 90-day pause in April. This pause lowered the tariff rate on Chinese goods into the US to 40 percent, from 145 percent. Consequently, we saw the shipping patterns change quite quickly. Shipping rates on containers essentially tripled right after that pause was announced. We’ll see what happens in the aftermath of the pause.

Additionally, the deadline for the moratorium on reciprocal tariffs is early July, and people are queuing up to try to make bilateral trade agreements, such as the UK trade agreement. It’s important to watch what’s happening in those trade agreements with different categories of goods because not all goods are the same. We encourage people to keep an eye on those categories of goods that are deemed important to national security—steel, copper, pharmaceuticals—as you likely will see very different treatments on those goods versus all other goods.

Scenario planning

Lucia Rahilly: Acknowledging uncertainties, how do you see the tariff situation evolving over, say, the next 12 months?

Shubham Singhal: The impact of these tariffs is meaningful to not only business cost structures but also demand patterns. Importantly, it’s not just about your own cost structure if your company moves. It’s the combination of where yours moves and where your competitors’ move, and what happens to the relative competitive advantage.

It’s important to look at a few tariff scenarios. One scenario is closer to 8 percent. This is where we have national-security-sensitive tariffs and assume some de-escalation continues with the US and China. Here the tariff level doesn’t go down to zero but is closer to 8 or 10 percent. The other end is the 29 percent scenario, in which we escalate again after these pauses. In the 15 percent scenario, some bilateral trade deals happen and some don’t. That’s a reasonable range too. Within that are other factors playing into the economy around productivity acceleration, AI, and the like.

There’s a discussion around fiscal reset in the United States that might be needed given the deficit, as well as central bank actions that might happen. Companies should look at those scenarios, understand what happens to the demand for their products, their cost structures, and their relative competitive advantage, and then decide how to move forward. Over the next 12 months, companies will begin to do that planning and have a sense of what actions to take as government negotiations continue.

Lucia Rahilly: Cindy, talk to us about how business leaders should be thinking about the overall macroeconomic context, given these variables.

Cindy Levy: You need to link your tariff scenarios to macro scenarios, given that the macro environment will be determined not only by tariffs: We also have a very big question about whether and when the US will move faster to take $1 trillion of spending per year out of the budget. Our economists see only $150 billion of that trillion announced so far, but there could be more fiscal reset to come.

If that comes, there would be an immediate recession but potentially a rebound three to five quarters later. If it’s delayed, then there could be a delayed recession. So it’s important to look at not only the tariffs but also some of the fiscal policies.

Companies should be looking at patterns of consumer and business demand, which are linked to tariffs but also broadly linked to expectations. A lot of the discussions we’re having with corporates are on not only the impact to their cost structures but also the demand erosion in what they produce in the near term. That determines the extent to which companies need to start executing on a number of resilience measures and how deep those resilience measures might need to be around cost prudence, investment prudence, etc.

Tracking trade patterns

Lucia Rahilly: Let’s go a little deeper into some of the market trends driven by tariffs and other geopolitical factors.

Cindy Levy: Let’s start with trade patterns, which is a question we get asked often.

Companies will now need to understand trade patterns at a more profound level in order to navigate the rapidly changing landscape of global trade. The imposition of tariffs can significantly impact the cost advantage of importing goods into the US, prompting companies to reassess their supply chains and strategic investments.

For example, with high tariffs affecting transportation equipment imports from China, other countries such as those in Europe and Latin America may now have a cost advantage. Companies in the transportation equipment industry need to consider shifting their investments towards these countries to capitalize on their newfound export position to the US.

In response to these challenges, industry leaders are adopting a three-pronged approach of “protect, prepare, and propel.” This includes mitigating downside risks by ensuring compliance with trade agreements like USMCA, reviewing supply chains, and optimizing logistics. Leaders are also preparing for the future by identifying opportunities for operational efficiency and shoring up their balance sheets.

Furthermore, leaders are taking strategic actions to position their organizations for growth in the long term. This involves assessing the impact of tariffs on their competitive advantage relative to competitors, understanding changing consumer demand patterns, and identifying growth opportunities in different trade corridors. Investment in commercial capabilities and production capacity is crucial for companies looking to capitalize on emerging opportunities in the market.

In the face of uncertainty, companies must also consider the potential actions of their competitors. Smaller players that may struggle to adapt to changing trade patterns could become acquisition targets for larger companies looking to strengthen their market position.

Overall, the age of strategy is back, and companies must be proactive in understanding and adapting to the evolving trade landscape. By leveraging data-driven insights and strategic decision-making, companies can navigate the complexities of tariffs and trade patterns to seize new opportunities for growth and success.

Strategic Insights for Navigating Market Shifts and Business Transformations

In today’s rapidly evolving business landscape, organizations are facing unprecedented challenges and opportunities. As industries continue to undergo significant transformations, it is crucial for leaders to adopt a proactive and strategic approach to stay ahead of the curve. The question arises: “If others are going to either exit markets or shed certain businesses, how do we position ourselves to lean into that?” And I think those are the much more strategic actions that companies are planning for and also need to be prepared to take.

Near- and long-term vision

Lucia Rahilly: Practically speaking, how can leaders organize to make these kinds of decisions, given ongoing flux?

Cindy Levy: In the near term, it’s essential that organizations can make fast decisions and are able to bring insights to those decisions in a structured way. Consequently, we see many setting up nerve centers.

These nerve centers can take on operational tasks but also be a source of insight to the rest of the organization on scenarios. As an example, some private equity firms have a nerve center to support tariff scenarios and economic modeling and to provide that insight to all their portfolio companies. It makes more sense to do it that way versus letting each portfolio company have an idiosyncratic or bespoke view on what might play out. Within the nerve center, it’s important to think carefully about the full perimeter of activities that might be valuable—to respond operationally, to Shubham’s point—but also to think about near-term resilience actions.

Again, there’s a lot of cash at stake in some of the near-term operational management opportunities. That’s not to be underestimated. Some organizations are bleeding millions a day because the products they’re importing haven’t been classified accurately. Shubham mentioned the lack of documentation on USMCA compliance, so they can’t get zero tariffs on items that should have zero tariffs.

They also might not have transfer pricing working in the right way. There might be product substitutes that they need to consider to reduce costs. If you set up a nerve center, you can create a category of these decisions and try to execute them quickly. There might also be near-term decision-making to take on pricing.

In terms of relative advantage, I spoke to one European industrial company that has US manufacturing, whereas its competitors do not. So its competitors will have much more of a cost experience issue vis-à-vis customers than it will. It’s starting to think about the time to grab market share and lock in long-term contracts because of the window of opportunity. How do you analyze that and tee that up for fast decision-making?

Geopolitical trends affect your near-term compliance management around tariffs: You don’t want to be caught out for not complying. They impact operations: What does the supply chain do? What does manufacturing do? Also, there might be a number of strategy calls you might have been about to enter, or maybe you’re considering putting capital into a country that has an unclear tariff scenario. You might need to immediately rethink that decision. Therefore, the enterprise needs a nucleus—a center of gravity—to help itemize and deliver against a diversity of decisions.

Trends beyond trade and tariffs

Lucia Rahilly: Taking an investor lens, any trends to highlight—new investable themes from policy tailwinds or value chain shifts?

Shubham Singhal: One we see emerging is on the industrial base, related to the increase in defense spending around the world—in Europe, Japan, and the United States. That’s a significant investable theme we’re seeing.

We’re also seeing capital spending gearing up. We’ve seen more supply chains move to India, for example, and out of China. Around eight years ago, we saw a lot of moves to Vietnam and Mexico. Following those, there was a lot of capital. More will move back to places like the US as well. It’s more high-end manufacturing and a lot more automation. And so again, we’re back to the technology theme and AI. Another round of capital spending needs to happen to be able to do that on a cost-effective basis.

How to make nerve centers work

Lucia Rahilly: What does talent look like for these nerve centers? Very practically, how do organizations make nerve centers a functional reality?

Cindy Levy: We learned a lot about the nerve center during the COVID-19 years. We see it as a cross-functional team where you bring expertise from around the enterprise to deliver on the different decisions that need to be taken.

Compliance, legal, operations, and logistics need to be in the nerve center. An interface that knows the supply chain should be there too. Some nerve centers have people from a central economics unit to anchor scenarios into one version of the truth and some commercial capability as well.

We do think there’s value in having the nerve center led by a full-time executive who could run a cadence of decision-making and make sure issues are elevated to the right levels of governance or the right management team for decision-making. We’ve also seen some good examples of trigger-based planning. The nerve center could say, “OK, what could happen? We might have higher Mexican tariffs for a while. We may get a re-escalation with China. What are we ready to do in some of those scenarios?” So it could have those diverse mitigation plans ready to go.

FAQ

1. How can organizations prepare for market shifts and business transformations?

Organizations can prepare for market shifts and business transformations by setting up nerve centers, bringing together cross-functional teams, and leveraging insights to make fast and strategic decisions. It is essential to analyze geopolitical trends, compliance management, and operational resilience to stay ahead of the curve.

2. What are some emerging trends in the industrial and investment landscape?

Emerging trends include increased defense spending globally, shifts in supply chain dynamics, and a focus on high-end manufacturing and automation. Organizations should consider capital spending and technology investments to capitalize on these opportunities.

Conclusion

As organizations navigate market shifts and business transformations, it is imperative to adopt a strategic and proactive approach. By setting up nerve centers, leveraging insights, and staying abreast of emerging trends, companies can position themselves to lean into market opportunities and drive long-term growth and competitiveness. With a focus on talent, cross-functional collaboration, and trigger-based planning, organizations can effectively navigate the complexities of today’s business landscape and emerge stronger and more resilient in the face of uncertainty.

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