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Donald Trump’s revolving door of tariff threats is roiling US markets and aggravating allies and adversaries alike. But it is worth remembering that many of the shifts in global trade and supply chains happening today have been under way for some time, and have little to do with the president’s antics. What’s more, the big trends aren’t necessarily always what you think they are.
Take, for example, the idea of nearshoring. This is certainly happening in North America, where a tighter trade relationship between the US, Mexico and Canada over the past few years has eased reliance on China (this of course raises the question of why Trump would want to disrupt a good thing). But at a global level, the average geographical distance of trade has actually climbed over the past decade, by about 10km a year, according to new research from the McKinsey Global Institute (MGI). The average distance a dollar of trade now travels is about 5,200km.
That’s in large part because “friendshoring” isn’t necessarily done locally. The US shifted supply to Mexico, yes, but also to Vietnam. Europe has moved away from Russian energy and towards the US — at least for now. And middle powers like Brazil, India and members of the Association of Southeast Asian Nations (Asean) are finding new trade alliances around the world. Despite many governments’ emphasis on reducing carbon load, which would argue for shorter supply chains (since transport and logistics are the second biggest source of greenhouse gases after China itself), global trade is as far flung as it has ever been.
That said, there are discrete trade blocs developing, but on a geopolitical rather than a geographical basis. Last May, an IMF study found that there were three major politically-aligned trade blocs emerging. First, there was a US-leaning one that includes the US, Europe, Canada, Australia and New Zealand. Second, a China-leaning bloc including Russia, Belarus, Syria, and Eritrea. Finally, there was a third bloc filled out by countries like India, the Asean states and others in the “global south” that are non-aligned or neutral in their relations to the US and/or China.
According to MGI, there has been a decline in trade between non-politically aligned countries of about 7 per cent between 2017 and 2024. While tariffs and trade wars play a role, a good chunk of this was down to the shock of Russia’s full-scale invasion of Ukraine in 2022.
This is far less than the trade fragmentation seen during the cold war, but it’s more significant economically, because back then global goods trade was 16 per cent of GDP, whereas now it is 45 per cent. Also, as IMF first deputy managing director Gita Gopinath has noted, countries within trading blocs were integrating during the cold war, whereas now they may actually be turning inwards. This is obviously true for the US, which is threatening tariffs on the very countries with which it has become economically closer over the past seven years.
But to really understand what’s changing in any given country, you have to dig into the nuances industry by industry. Consider, for example, the sharp increase in US imports of transport equipment from Mexico. You might think this is about importing less from China, but in fact it is about a decline in trade with Canada. Likewise, while bilateral US-China trade is down, US import value dependent on China hasn’t declined much. This is partly because products that originate in China are being shipped to third countries before being sent to the US. As ever, tallying the reality of global trade is a tricky business.
How are companies adapting to this new world? Rather than choosing a single bloc, most are starting to shift to a different model that builds in extra costs in order to work in all three. They are also looking for ways to reduce geopolitical risk in product development. Unilever, for example, is doing less customisation for markets, and relying instead on industry standard specifications, so as to be able to move products quickly from one market to another as the political environment changes.
Many companies are also using AI to predict where new trade disruptions might occur, and automating more complex supply chain action plans. The German company Schneider Electric, for example, has developed a software “control tower” that looks across the entire multilayer supplier network and immediately reroutes orders to different parts of the network if a particular company or country can fill them.
While Trump’s tariffs and counter-tariffs will certainly have an impact on the shape of trade in the next few years — many international companies are already rushing to fall in line and put more production capacity in the US — there are larger trends that will continue to play out long after the current administration is gone.
China, for example, recently announced proposals to speed up its own technology decoupling plans, which were launched in 2015, before Trump was even elected. A recent Boston Consulting Group report predicted that two-way trade between the west and China would contract by $221bn by 2033, a decline of 1.2 per cent. I’ve always thought that the world gives the US too much credit for what actually happens in global trade. The paradigm is shifting, with or without Trump.
