How to navigate the unpredictable landscape of world trade

Trade growth outpaced global growth in gross domestic product (GDP) for three decades before the COVID-19 pandemic disrupted supply chains worldwide. As the pandemic’s effects subsided, the conflict in Ukraine and its repercussions replaced it as a drag on trade growth. Alongside these acute disruptions, the global trade environment has become less friendly overall.

Trade tensions have been rising even before the pandemic, and a new economic nationalism has begun to counter the decades of globalization that followed the end of the Cold War and the opening of China to the world. As a result, through 2031, trade will grow at only 2.3% versus the 2.5% growth forecast for GDP, according to Boston Consulting Group’s Global Trade Model.

Economies are still adjusting to the economic and geopolitical shakeups of the past three years but the challenges affecting global trade are here to stay. How can companies that depend on global supply chains manage today’s uncertainties and prepare for future risks?

Understand how trade flows are shifting

China’s trade with the United States will continue to decline, while its trade with the EU will grow more slowly than the global average. This trajectory opens opportunities for India, Mexico and again for the ASEAN countries, which will increase trade not only with the United States and the EU but also with China.

Diversify to mitigate risk

As trade disputes threaten global supply chains, government policies are encouraging diversification directly and indirectly. New laws in the United States promote domestic manufacturing and drive companies to diversify their supply chains. Escalating trade tensions between the EU and China have European countries turning to suppliers in other parts of the world.

These supply chain disruptions will hit some industries harder than others. Energy-dependent sectors will scramble to improve sustainability and find alternative energy sources, while industries that depend on semiconductors are learning the critical importance of diversifying their supply chains in the face of increasing trade restrictions.

How should companies respond?

Today’s uncertain trade environment demands a new balance between efficiency and lower costs on the one hand and the heightened need to identify and respond to global risk on the other. Many companies are already making changes to prioritize their supply chain resilience and diversification but every global company should be taking these steps to respond to current changes:

• Understand the major risks to your value chains. Which inputs have the biggest impact on your operations? Where do those inputs come from and how do they reach you? Who are the key suppliers and who are your alternatives?
• Prioritize actions that bolster supply chain resilience.
• Prepare for previously “unlikely” shocks: build up a buffer inventory of at-risk commodities and pre-qualify alternative suppliers.
• Develop contingency plans for at-risk key commodities. This strategy might include funding research and development for alternatives to rare minerals or developing supplier relationships across multiple continents.

“World trade will grow over the next decade, even if at a slower pace. Beneath this overall slower growth are significant shifts in trade corridors.”

— Marc Gilbert, Managing Director and Senior Partner, Boston Consulting Group | Michael McAdoo Partner and Director, Boston Consulting Group

What should companies plan long term?

The effects of war, pandemic and protectionism will influence trade flows worldwide for the foreseeable future. Value chain resilience must be an ongoing practice rather than a one-time achievement. Companies can succeed by pursuing these long-term objectives:

• Incorporate geopolitical scenario planning into capital allocation processes and supply chain management. Run a range of geopolitical disruption scenarios to plan for contingencies. Maintain active monitoring of signposts as scenarios unfold.
• Recognize the implications of environmental, social and governance (ESG) objectives for global supply chains and incorporate those into your planning.
• Assess organizational talent to have people in leadership roles who can identify and manage global risks as early as possible.
• Use modern analytical tools, such as supply chain control tower and digital twins, to identify the earliest possible indicators of emerging shocks or disruptions, visualize scenarios and contingencies and respond and adjust quickly.

World trade will grow over the next decade, even if at a slower pace. Beneath this overall slower growth are significant shifts in trade corridors. These shifts will produce new winners and losers. The actions companies take now can ensure they remain on the winning side.

Source: World Economic Forum