The global economy's Achilles' heels
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A defining story of this decade has been a series of global economic shocks: pandemic, war and geopolitical shifts. New research quantifies a rising set of vulnerabilities for the global trade system.
The big picture: Many crucial global goods are built on supply chains that have one or more Achilles' heels, a report from the consulting firm McKinsey finds — a critical input, concentrated suppliers and geopolitical strain.
- That manifests partly in physical chokepoints. The Strait of Hormuz is the one most in the news, but the McKinsey researchers identify a couple dozen others globally, through which 80% of maritime trade passes (although with varying levels of difficulty for shippers to route around).
- In effect, as the global economy has become more integrated over the last few decades, these vulnerabilities have become more pronounced — which in turn helps explain why the 2020s have brought an ongoing series of disruptive supply shocks.
By the numbers: They find that the share of global imports that face at least two of three major vulnerabilities has risen to 23% in 2024 from 15% in 2000.
- The list of items with overlapping vulnerabilities includes basic materials like iron ore and more advanced items like lithium-ion batteries, smartphones and memory chips.
What they're saying: "It's not necessarily that trade has gotten less reliable," Tiago Devesa, a co-author of the report, tells Axios. "I think it's more that we have the realization that we actually want to understand what are the potential points of failure, so we can anticipate them."
- "I think you could make a case that throughout all of these shocks, trade has continued to increase, and trade was actually a very important balancing mechanism," he adds.
- "It's been increasing precisely in part because we've integrated the fabric of the global economy much more, and in particular, we've led a specialization effort that led to more concentration around the world," says Devesa, a senior fellow at the McKinsey Global Institute.
Reality check: Reducing vulnerabilities and building economic resilience isn't necessarily as simple as relocating a factory.
- "Some companies just change their suppliers or factory from a geopolitically distant country to a geopolitically closer country, and they think that they achieved resilience," said Jeongmin Seong, a co-author and McKinsey partner.
- "Even though you change the location of the final assembly, unless you eliminate the risk at this upstream level, you are still exposed."
Between the lines: The steady march of globalization paid major dividends in recent decades in making goods more affordable and powering global growth.
- Now companies — and governments — are seeking to mitigate the vulnerabilities that system has created and that the last several years made plain to see.
