The global economy's Achilles' heels

In recent years, a series of global economic shocks, including the pandemic, war, and geopolitical shifts, have exposed a growing set of vulnerabilities in the world's trade system. A report from consulting firm McKinsey highlights that many essential global goods rely on supply chains with at least one Achilles heel – a critical input, concentrated suppliers, or geopolitical strain.

This has led to physical chokepoints, such as the Strait of Hormuz, which accounts for a significant portion of global maritime trade. However, these vulnerabilities have become more pronounced due to the increased integration of the global economy over the past few decades.

According to the report, the share of global imports facing at least two of three major vulnerabilities rose to 23% in 2024 from 15% in 2000. These items include basic materials like iron ore and advanced products like lithium-ion batteries, smartphones, and memory chips. McKinsey's co-author Tiago Devesa emphasizes the importance of understanding potential points of failure to anticipate disruptions.

He notes that globalization has made trade more reliable, as the global economy has become more integrated and specialized, leading to increased concentration of production worldwide.

However, reducing vulnerabilities and building economic resilience is not as straightforward as simply relocating a factory. Companies may change suppliers or factories to closer, more geopolitically stable locations, but this does not eliminate upstream risks. According to co-author Jeongmin Seong, unless the risk at the upstream level is eliminated, companies remain exposed.

While globalization has led to more affordable goods and powered global growth, the findings underscore the need for companies and governments to mitigate these vulnerabilities exposed by recent years.