The complication of concentration in global trade

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Olivia White, Senior Partner, McKinsey & Company, Sven Smit, Senior Partner, McKinsey & Company

• Global trade has been significantly disrupted by geopolitical events and supply chain disruptions.
• Now, there is growing concern over the resilience of supply chains — specifically, how concentrated the supply is that some regions and sectors depend on.
• Around 40% of global trade of goods depends on trade relationships for which the importing economy relies on three or fewer economies for the supply of a given product.

Ours is an interdependent world. It is connected by global flows of goods, services, capital, people, data and ideas, but over the past three years, major disruptions to trade and supply chains and a changing geopolitical landscape have prompted widespread discussion about how to make those connections more resilient.

Recent McKinsey Global Institute (MGI) research found that there is no major region of the world that is close to being self-sufficient, but that in every sector — and indeed at every stage of the production process — there are products whose origins are concentrated in just a few geographies.

When interdependency is subject to such concentration, challenges can arise. In this context, understanding fully each economy’s “concentration fingerprint” is a useful starting point for managing it.

Economies around the world rely on global flows. The EU and Asia-Pacific rely on energy imports to meet 50% and 25% of their needs, respectively. North America relies on inflows for diverse needs, from resources such as minerals, intermediates such as basic metals and chemicals and final products such as electronics. The Middle East and North Africa and sub-Saharan Africa import about 60% and 20%, respectively, of the agricultural products they need, notably grains.

Concentration and global trade, in numbers

Overlaid on this broad-based interdependence is widespread concentration. But how much, and where? For its report, “The complication of concentration in global trade,” MGI analysed 6,000 globally traded products in 130 economies, totalling more than eight million individual trade corridors in 2021 to shed light on two under-appreciated aspects of the concentration debate

1. Concentration in trade relationships is prevalent.

Overall, around 40% of global trade of goods depends on trade relationships for which the importing economy relies on three or fewer economies for the supply of a given product. Narrowing the aperture further, cases where the importing economy relies on two or fewer economies for a given product represent 15% of global trade. These concentrated trade relationships are particularly pronounced in resources and the food value chain, but are present in all sectors for important products ranging from complex final products such as laptops, to intermediates such wire sets and commodities such as wheat.

All economies participate in concentrated trade relationships. Every economy sources at least 20% of imports by value from three or fewer economies; at least 5% percent are from two or fewer economies.

2. Concentration often reflects economy-specific factors rather than a lack of global suppliers.

The vast majority of concentration occurs when an individual economy has a relatively concentrated set of import partners for a particular product despite the fact that the product is available from a relatively diverse set of partners.

Of the 40% of the value of global trade that relies on three or fewer supplier economies, about three-quarters corresponds to such “economy-specific concentration”. These concentrated relationships are not driven by a lack of alternative suppliers, but by a range of factors, including geography, consumer and business preferences, preferential trade arrangements and supplier structures and relationships.

In the case of geography, for instance, nearby nations are likely to be preferred for goods that involve significant transportation and holding costs. For example, Egypt and Türkiye historically sourced more than 80% of their wheat from relatively proximate Ukraine and Russia, while Mexico sources almost 90% of its wheat imports from the United States.

Larger economies, in particular those highly integrated into the manufacturing value chains of Europe and Asia, such as Germany or China, tend to be relatively less concentrated on average. Nevertheless, even these economies depend on some concentrated imports. For instance, China’s sources more than 95% of its demand for soybeans, used primarily as pigfeed, from the United States and Brazil. Germany historically sourced most of its natural gas from the Nord stream pipeline, and more than 80% of bulk antibiotics from Switzerland.

Smaller economies in emerging regions tend to have more concentrated trading relationships across a broader range of imports. Contributing to this is that it is harder for such economies to develop a range of suppliers because trade volumes are relatively limited, as well as the fact that they tend to lack sufficient domestic infrastructure and systems to support diversification in trade.

Decision makers need a concentration “map”

As multinationals and policy makers seek to balance growth and resilience at a time when geopolitics and therefore country-level concentration become more relevant, a concentration map would help them understand where and when concentration matters for them.

Not all concentrated trade relationships need addressing. In some cases, watchful waiting may be the best response. In some cases, however, action might be appropriate. One way to reduce any stress from interdependency is through innovation supported by private- and public-sector partnerships. The Department of Energy in the United States has supported chemicals and battery manufacturers in their development of low-cobalt cathode formulations for electric vehicle batteries in order to mitigate concentrated dependency on cobalt that comes largely from Democratic Republic of Congo.

Alternatively, proactive diversification may be the best move. Over the past decade, Singapore has diversified its natural gas supply, building a liquefied natural gas terminal to gain access to the seaborne market.

While it only takes two to tango, in the dance of global exchange casting eyes wider to consider more — or different — prospective partners may be the way to win.