Partner & Director, Global Trade & Investment
Global trade has been disrupted over the past few years by numerous shocks, including Brexit, geopolitical tensions, and the pandemic. We spoke with Michael McAdoo, a BCG partner who specializes in geopolitics and trade, about how the developments in global trade are reshaping the landscape for North American companies.
BCG: How are changes in global trade influencing the strategic thinking of North American executives who you talk to?
Michael McAdoo: Not long ago, people were saying that all these shocks were isolated events or passing fads. They assumed we’d eventually go back to the world as we knew it—the era of globalization that followed the fall of the Berlin Wall and the opening to the world of the Chinese and former Soviet Bloc economies. During this golden age of globalization, goods and capital flowed across borders with ever-growing ease. I think the war in Ukraine marks the end of that era and the certainty that it seemed to provide. Now, rather than assuming a steady-state future, more companies are starting to factor in various scenarios and seeing how they can make their supply chains more resilient for all of them.
How is this new reality changing the global trade landscape?
In general, global trade continues to grow. But it’s growing at a slower pace as a share of global GDP than it used to. This growth also is occurring in different corridors. While China’s trade with the US is still bigger in nominal terms than it was five years ago, for example, it’s lower as a share of each nation’s GDP. Meanwhile, US trade with Vietnam has been growing dramatically. So has US trade with Malaysia and Mexico and also with countries in the EU. We’re seeing similar shifts elsewhere in the world and expect they will become even more pronounced.
How are these shifts changing the economics of global sourcing?
North American companies aren’t running away from cost, quality, and on-time delivery—the long-held holy trinity of sourcing. But they are introducing the factor of resilience. Developments such as the myriad US tariff regimes, the pandemic, and the war in Ukraine made CEOs realize that they no longer have a profitable business if they suddenly can no longer source an input or a product. But they’re also finding that a robust and resilient supply chain may be worth some extra cost.
How much added cost are we talking about?
First, I’d like to dispel the myth that resilience costs a lot more. In many cases, I don’t think it does. It’s possible to find alternative places to source from that are less vulnerable to shocks and acceptable from a cost perspective—though it may take time to find them. It’s also helpful to implement technological advances, such as the suite of technologies and processes known as Industry 4.0. Fundamentally, they allow a company to get an equivalent cost of goods but with a different mix of labor and capital. Investments in robotics, automation, artificial intelligence, and such—along with producing goods closer to end markets rather than shipping over long distances—can mean that the lowest possible labor cost is not the most important criterion for sourcing many goods.
How is this reassessment affecting different industries?
Each industry has to design supply chains given its own sensitivities, vulnerabilities, and opportunities. Supply chain design can also vary by product category. Trade changes affect three broad product groupings. One involves sensitive technologies, such as semiconductors, that are subject to export controls or other restrictions that countries impose on nations they consider unfriendly. The second grouping involves critical materials and minerals that are subject to new policies that can change the economics of a supply chain. The US, for example, is trying to bring electric-vehicle supply chains back to North America or to so-called friendly countries; the EU is doing this with a policy it calls strategic autonomy. The third grouping includes products that may be hit by tariffs, changing cost structures, or geopolitical storms even if they aren’t a primary target. This group mainly includes consumer products and sectors with relatively low-level technology. For the many other goods that don’t fall in these three groupings, though, it still makes sense to make them where they’re being made now.
What are the hottest manufacturing locations right now?
A major shift to Southeast Asia is already showing up in the data. From a trade perspective, the ten countries that belong to the Association of Southeast Asian Nations are really remarkable. Together, they have more than 650 million people and a wide diversity of export sectors. Members are also economically diverse: Myanmar and Laos are lower-income nations, while Singapore has a very high per capita GDP. The two hottest locations right now are Malaysia, which has great strengths in electronics manufacturing, and Vietnam, which is growing in light manufacturing and assembly operations. There’s also a lot of momentum in Indonesia, which has a large domestic market and a government that is currently very favorable toward trade.
In some cases, we’re seeing manufacturing that moved to Asia two and three decades ago return to the US, Western Europe, or adjacent markets—including Mexico, Morocco, and Turkey—especially for new production. Electronics and aerospace companies are going to Mexico, for example, including some that left about two decades ago.
Building a new industrial supply chain in a different region sounds easier said than done. Are companies actually doing this?
It’s happening. But it will take time and often requires supplier development. A country may have a manufacturing base close to what a company needs, but the suppliers may not yet have the skill sets and qualifications needed to be in the company’s supply chain. For example, Mexico has a very well-developed automotive supply base, especially for castings and the machining of metal parts, that aerospace manufacturers could tap into. But they also require specific certifications and quality standards, as well as the traceability of components. So, an automotive supplier would need to build up in these areas before it could become an aerospace supplier.
Aerospace manufacturers have used a two-pronged approach in Mexico. First, they enticed existing suppliers in high-cost countries to establish operations in Mexico. They did so by helping the suppliers meet local officials, secure facilities, and establish special worker-training programs so they could ramp up. Second, aerospace manufacturers found Mexican suppliers, particularly from the automotive sector, that had similar manufacturing capabilities but lacked aerospace certification. The aerospace OEMs then launched supplier development teams to help suppliers get the certifications needed. So, the companies used a mix of foreign and domestic capital to establish locally based supply chains that met global quality standards. It can take years before a supplier can ship in quantity in such a context. But aerospace is a long-cycle business, so this can make economic sense. Similar approaches can be used in other sectors and locations.
To paraphrase Mark Twain, rumors of the death of global trade are greatly exaggerated. Trade flows are just shifting. And there are many new places, and many new ways, that can enable a company to source at a low cost.