Shorter Trade Corridors And The New Map Of Global Supply Chains

Global trade volumes recovered after the pandemic, but the map underneath them has been redrawn. The world is not de-globalising so much as rewiring. One of the more useful lenses in recent research is the distinction between geographic distance and geopolitical distance. Geographic distance is literal kilometres between trading partners. Geopolitical distance is an index of how far apart economies are in political alignment and institutional terms. Since 2017, the value-weighted average geographic distance of global goods trade has kept inching up by about 10 kilometres a year. But over the same period, the geopolitical distance of trade has fallen by roughly 7%. In plain language: goods are still travelling long physical distances, but they are increasingly flowing along “friendlier” corridors.

That shows up most clearly in the behaviour of economies at the centre of recent tensions. The United States, China and Germany have all seen sharp declines in the geopolitical distance of their trade, meaning they are doing relatively more business with partners that are closer to them politically and institutionally than a decade ago. Yet import concentration has not blown out: the breadth of trading relationships for specific goods has remained broadly stable over the same period. The system is diversifying within blocs, not collapsing into isolated islands.

To understand how this plays out at the product level, the McKinsey team introduces a “rearrangement ratio” for US imports from China. The ratio compares the value of US imports of a given product from China with the total value of that product’s exports available from all other countries. A ratio below 0.1 means the non-China export market is at least ten times larger than current US imports from China, rearranging sourcing is relatively easy. A ratio above 1.0 means US imports from China exceed the entire export supply from the rest of the world, rearranging is close to impossible.

Roughly 35% of US imports from China sit in the “easy to rearrange” bucket with ratios below 0.1. Think products like basic textiles or relatively commoditised electronic components. At the other extreme, about 5% of trade has a ratio above 1.0, including items like rare-earth magnets, where there simply is not enough alternative export capacity available today. Between those poles lies a wide middle ground, where rearrangement is theoretically possible but practically complex. The split by end use is revealing: about 61% of business-input imports have very low rearrangement ratios, versus just 16% for consumer goods. Major consumer products like laptops, smartphones and toys are in the “hard to rearrange” category.

This has two immediate implications. First, “China+1” or “friend-shoring” strategies are far more feasible in some product categories than others. It is relatively straightforward to diversify sourcing for many intermediate goods by expanding capacity in multiple manufacturing hubs. It is far harder to re-route complex, high-volume consumer supply chains that have become tightly optimised around Chinese ecosystems. Second, the political rhetoric of “moving supply chains out of X and into Y” often glosses over these constraints. The rearrangement ratio is a useful reminder that, for a non-trivial chunk of trade, the rest of the world simply does not have the slack to absorb a rapid pivot.

Where does this leave countries that are neither Washington nor Beijing? One clue comes from the foreign-direct-investment data. Since 2022, about three-quarters of cross-border FDI announcements have targeted a cluster of high growth and future shaping industries: advanced manufacturing, AI-related data infrastructure, and energy and mining projects needed for the transition. Many of these investments are explicitly about building alternative nodes in critical supply chains so that multinationals can reduce geopolitical exposure without sacrificing efficiency entirely.

That combination of shorter geopolitical distances, product-level constraints on rearrangement, and targeted FDI into new hubs, is the real story behind the headline shift. Trade is not retreating; it is being re-routed through corridors that align more closely with security and policy considerations. For firms, that means supply-chain strategy is no longer a pure cost-efficiency optimisation problem. It is a multi-variable exercise that includes resilience, regulatory risk and access to future-shaping ecosystems. For investors, it means country and sector exposures cannot be reduced to simple “EM good / DM safe” binaries. Some emerging locations will gain as alternative production bases; some developed-markets will discover that their dependence on hard-to-rearrange inputs is a structural vulnerability.

The underlying message in the data is straightforward: globalisation is changing its geometry, not disappearing. The profitable positions over the next decade are likely to be in the parts of that new geometry that combine geopolitical durability with credible capacity to deliver, rather than in the loudest narratives about decoupling or re-shoring.

Brand Manager

Aayushi Thakur

Frequently Asked Questions

Q: What does it mean that trade’s “geopolitical distance” is shrinking?

A: It means countries are trading more with politically and institutionally aligned partners, even as overall trade and the physical distances involved remain large.

Q: What is the “rearrangement ratio” for US–China trade?

A: It’s a measure comparing US imports of a product from China with the export capacity for that same product from the rest of the world, used to gauge how easily sourcing can shift away from China.

Q: How much US–China trade is easy to re-route today?

A: Roughly a third of US imports from China, by value, sit in categories where alternative export capacity outside China is at least ten times current US import volumes, making diversification more feasible.

Q: Why are some supply chains hard to move even if geopolitics demand it?

A: In products like laptops, smartphones, toys, and certain critical inputs, China’s share is so large that other exporters simply do not have enough capacity yet to absorb a rapid shift.

Q: How does new FDI fit into this rewiring story?

A: Recent FDI is heavily concentrated in advanced manufacturing, digital infrastructure, and energy projects that aim to build alternative production hubs and reduce dependence on any single country or corridor.

Sources

McKinsey Global Institute, McKinsey Global Institute: 2025 in charts.