How Trump's tariffs could reorder global trade—and make Europe a winner

Mint

2 days ago

Europe could be at center stage as the Trump administration's tariffs upend the global trading system, slashing Chinese imports to the U.S., a report from the McKinsey Global Institute finds.
President Trump's aggressive trade policy has sparked concerns about a recession and a painful unwinding of the globalization of recent decades that had expanded profit margins and kept prices low. A detailed look at trade flows by McKinsey offers a window into potential pain points—and how trade could be rearranged.
Companies have been gripped by trade uncertainty since the Trump administration tried to reshape the trading system, announcing a blitz of tariffs against nearly 200 trading partners in early April.While the administration has said several agreements are nearing the finish line, so far it has struck only one trade deal—with the United Kingdom—and been on a carousel of escalation and de-escalation with other major trading partners, including Canada, the European Union and China.
Markets have become more sanguine about trade; the S&P 500 just hit a new record. Companies caught up in the trade war may need to reduce affected business lines, increase production of other lines, find new suppliers or absorb higher costs.
The specifics are critical. 'So much of this discussion is based on high-level trade models but any individual supply chain readjusts at the actual level of trade so we wanted to look at what the options were," says Olivia White, a director at McKinsey Global Institute and co-author of a report that tries to assess the possibility of disruptions, shortages and price impacts to aid companies rethinking trade strategy.
The authors developed a 'rearrangement ratio," measuring a country's imports from a trading partner as a share of what is available from other exporters. Those imports most vulnerable to disruption are the ones with higher ratios.
The good news: About 35 percent of the $440 billion the U.S. imports from China have a ratio less than 0.1, which means that the available export market is 10 times as big than what the U.S. buys from China. T-shirts, taps and valves and logic chips fits into this bucket.
McKinsey estimates about 60% of intermediate goods—including auto parts and semiconductors—are relatively easy to source elsewhere. Another 30% of intermediate goods have a slightly higher rearrangement ratio but could still be sourced from suppliers not in China.
Only about a quarter of U.S. imports from China have a rearrangement ratio of greater than 0.5—and much of that is electronics, like laptops. McKinsey estimates only 5% of imports have a ratio of more than 1, which means the amount the U.S. imports buys China exceeds what is available from other suppliers.
That latter bucket includes fireworks, charcoal barbecues, vacuum flasks, fireworks and natural graphite. While the rare earth magnets critical to electric vehicles and military applications are also in this grouping, McKinsey noted many other critical minerals don't rise to this level.
Though Mexico and southeast Asia have been popular alternative destinations for those diversifying supply chains away from China, McKinsey finds Europe well-positioned both as an alternative supplier of exports to the U.S. and a large market destination. Based on most of McKinsey's simulations, European exports to the U.S. could replace 30% to 65% of what the U.S. buys from China, and Europe's U.S. exports could rise meaningfully even with tariffs.
Turkey already is a large textile manufacturer for other parts of Europe. Poland sells lithium-ion batteries to others in the region, and Czechoslovakia is a big supplier of toys. If trade shifts, these countries could potentially ship more to the U. S.—and Chinese goods could fill the hole for European demand. 'Europe could emerge as the fulcrum for this rearrangement," White says. Perhaps that could give the European Union some leverage as it tries to reach some sort of a trade framework with the U.S.