All countries rely on trade. In fact, according to research by McKinsey, no part of the globe is close to being self-sufficient, with every region dependent on the rest of the world for more than 25 percent of at least one important type of good. However, one potential barrier to the smooth flow of global imports is that the sources of a large number of goods are concentrated in just a handful of countries.
Indeed, a new research paper from the consultancy warned that this is resulting in a number of complications. What's more, numerous global shocks in recent years, from disruption in the Chinese manufacturing sector caused by Covid-19 shutdowns to the impact of Russia's invasion of Ukraine, have highlighted the potential risk of such dependencies.
So what are the dangers of this trade consolidation and what should businesses and nations around the world be doing to ensure resilience in their supply chains?
Trade concentration 'often a choice'
Although some parts of the world's economy are highly diversified, McKinsey found that more than 40 per cent of global trade goods rely on three or fewer exporting countries.
For some products, this is due to supply issues. For instance, 90 percent of the world's soybeans come from either the US or Brazil. However, in most cases, this concentration is due to the choices made by economies, rather than issues such as limitations on raw materials or manufacturing expertise.
Looking at wheat, for example, the report noted that although the majority of the global market (90 per cent) is split between 15 countries, most nations only import from two or three.
This is true in both developed and developing economies, with every country in the study sourcing at least 20 percent of their imports (by value) from three or fewer trading partners.
Overall, about 15 percent of global goods trade involves cases where the importing economy relies on only one or two nations. This can create difficulties should supplies from these partners be disrupted, though the effects vary depending on the choices made by governments.
"On the one hand, concentrated trade relationships can reflect and drive efficiency gains," McKinsey stated. "On the other, interruption of concentrated trade flows can be particularly disruptive if products are harder to replace on short notice due to a lack of visibility and alternatives."
Which sectors are most exposed?
McKinsey noted that concentration occurs across all sectors, ranging from raw materials to manufactured goods. However, it highlighted a few key industries where this trend is especially pronounced - some of which have already experienced difficulties due to recent economic and geopolitical events.
For instance, the mining and electronics sectors are both driven by concentrated global supply. Electronics is the most concentrated of any major manufactured goods category, mostly due to the impact of Chinese-manufactured phones and laptops. Meanwhile, in the mining sector, 50 percent of all trade by value is in products supplied by three or fewer economies, with Australia and Brazil being the primary exporters.
McKinsey noted that major economies have failed to significantly diversify their imports over the past five years, with countries often developing particularly dependent relations for specific products. For example, the US imports almost all of its semitrailer trucks and light goods vehicles from Mexico, while in the other direction, nearly all of Mexico's maize, propane, and refined petroleum products come from north of the border.
"Economies have often been most vulnerable to disruptions in sectors where domestic consumption relies on inputs that come from a concentrated set of trading relationships," the report noted. "China relies more on concentrated relationships in mining; for Germany, it is energy resources and agriculture."
What should nations be doing to address the issue?
In order to protect global trade against disruptions to these concentrated supply chains, McKinsey noted there is a range of steps countries can take. However, it noted that while diversifying supply chains to tap into expanded sources of imports is often a good solution, it is not the only one.
"When alternative supply is not an option, such as when trade is globally concentrated, business and policy makers may look to redesign products or production processes to shift away from concentrated inputs," the report stated.
In some cases, concentrated supply chains can actually be a source of competitive advantage. In such cases, it is important to invest in reinforcing these relationships in order to improve their resilience.
McKinsey added that addressing issues related to concentration is not only about reducing risk. It said: "A transparent and up-to-date understanding of concentration, combined with the right measures to manage interdependencies, can be a source of competitive advantage."
Organizations that are able to demonstrate careful management of their exposure to import concentration are likely to be more resilient in a changing world, the report concluded.