The new geometry of trade: How leaders can respond to structural shifts

The past year has been exceptionally tumultuous for global trade, marked by tariffs, geopolitical volatility, shifting trade relationships, and the dual impact of AI on both trade and rivalry. Despite these disruptions, global trade continued to grow in 2025, even outpacing the global economy. This growth was supported by several new trade deals, including the India-EU trade agreement and deals involving the US and Mercosur. The research indicates that trade is not delocalizing or regionalizing in the traditional sense. Instead, it is rewiring towards shorter geopolitical distances, meaning countries with aligned foreign policies are trading more with each other. While direct US-China trade has decreased, this rewiring is more surgical than a complete overhaul of trade. A key insight is that only a small percentage of imports (around 5% for the US) fall into the category of being critical, concentrated, and sourced from geostrategically unaligned countries. Trade policy uncertainty is a persistent factor, as the world seeks balance. This uncertainty is unlikely to be temporary and will not unfold in a straight line. Beyond goods, trade in services, data, and intellectual property continues to grow and reconfigure. Leaders are grappling with broader challenges beyond trade in today's multipolar context. The dawn of the intelligence revolution, potentially as significant as the industrial revolution, is creating economic and geopolitical shifts. This is leading to a resurgence of industrial policy, with substantial financial incentives in the US and EU since 2020, focusing investment on strategic industries. This is also intertwined with domestic policies on environment, labor, and immigration, balancing climate goals with energy security. Import and export controls are increasing, particularly in concentrated sectors like semiconductors. Currency movements are also a significant factor, with countries being mindful of their impact. The security environment, highlighted by conflicts in Ukraine and the Middle East, plays a crucial role. Countries are assessing national security and defense capabilities, leading to foreign investment restrictions, sanctions, and embargos. This extends to AI, with debates on technology transfer, intellectual property diffusion, and the creation of separate technology stacks. Cybersecurity is also paramount, with AI potentially enabling new forms of cyber threats, often from state actors. Conflicts impact critical choke points, but they also foster multilateral cooperation and alliances, shifting the movement of defense technology and other trade. Three primary forces are reconfiguring the trade landscape: AI, China, and the rise of connecting economies like ASEAN. AI, while accounting for a moderate 7% of total trade, was responsible for a third of global trade growth in 2025, with a more pronounced impact on the US due to its data center capacity. This trend is driving growth in countries like South Korea and Taiwan, powered by their semiconductor industries. China continues to be a major player, but its role is evolving from the "factory of the world" to the "factory to the factories." Despite high tariffs, China achieved a record trade surplus in 2025. While exports of final consumption goods declined slightly, exports of intermediate goods, crucial for further production, grew significantly. China's trade with emerging economies, the "global South," is substantial, enabling these nations to become manufacturing hubs. China's export growth remains strong, with intermediate goods prices remaining stable or increasing. The rise of connecting economies, particularly ASEAN, is significant. These economies act as crucial intermediaries for global supply chains, preventing disruptions. ASEAN's exports and imports grew substantially in 2025, with significant contributions from the US on the export side and China on the import side. The key question for these economies is their capacity to add meaningful local value. Foreign Direct Investment (FDI) is a leading indicator, moving faster than trade and reflecting geopolitical realignments twice as quickly. FDI is increasingly flowing into "future-shaping sectors" like AI infrastructure and advanced manufacturing, a trend that has accelerated post-COVID. The US has become a major magnet for FDI, with announcements doubling compared to pre-COVID levels, while FDI into China has declined significantly. However, China maintains its outbound investment, remaining a substantial global investor. This suggests that businesses should use FDI signals to anticipate changes and inform their manufacturing and supply chain decisions. For business leaders navigating these shifts, five key characteristics of successful companies have emerged: 1. **Managing Earnings Disruption and Driving Value Creation:** Leading companies go beyond defensive cost containment to actively drive productivity and strengthen their balance sheets. This proactive approach allows them to potentially acquire struggling competitors or gain market share. 2. **Strategic Capital Deployment:** Companies are not shying away from capital deployment but are making more informed decisions. They consider scenarios, payback durations, and leverage industrial policy incentives and government engagement, such as capital subsidies for new manufacturing sites. 3. **Global, Adaptable Operations:** Contrary to initial assumptions of localization, global operations have proven more resilient. Companies with flexible global footprints can shift production and markets effectively, as demonstrated by a consumer goods company rerouting chocolate production to mitigate tariff impacts. Adaptability and agility within production networks are crucial, with factories capable of producing multiple product types becoming more valuable. 4. **Focused, Informed Growth:** Aligning with growing trade corridors and sectors is essential. Companies are identifying and capitalizing on high-growth areas like defense, advanced manufacturing, and energy infrastructure, as well as the services supporting them. 5. **Organizational Speed:** The ability of an organization to move quickly – entering or exiting markets, redeploying capital, shifting production, and responding to crises or opportunities – is a key competitive advantage. CEOs are actively working to retool their organizations for this era of volatility. One example of proactive response involves a global consumer company that, following a significant tariff event, rewired its strategic planning to be more event-based and adaptable. Instead of viewing tariffs as an operations issue, the management team treated it as a whole-business challenge, leading to decisions on cost containment, new market entry, and strategic M&A, and reallocating resources towards competitive advantages. This adaptability and holistic approach were critical to their success.