As geopolitical tensions persist, global trade dynamics are becoming increasingly complex—and many leaders find themselves on tenterhooks. On this episode of The McKinsey Podcast, Cindy Levy and Shubham Singhal, two global coleaders of McKinsey’s geopolitics work, join Global Editorial Director Lucia Rahilly to discuss how to move forward amid rapidly reconfiguring trade relationships—regardless of the way current tariff talks play out.
This conversation has been adapted from our McKinsey Live series.
The McKinsey Podcast is cohosted by Lucia Rahilly and Roberta Fusaro.
The following transcript has been edited for clarity and length.
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Roberta Fusaro: Check out our recent report about how to win the right battles for consumer attention. Just to make things trickier, not only is it tough to earn people’s focus, but consumer behavior is a little confusing these days. Understanding what’s motivating consumers to spend is the focus of our recently published State of the Consumer report.
Getting a handle on trade unpredictability
Lucia Rahilly: The tariff landscape remains dynamic and uncertain. Cindy, what do we need to know about where we are now and what’s likely to happen in coming weeks?
Cindy Levy: It has been an eventful number of months, and we’re doing our best to keep on top of developments. The announcements in mid-April took us from a 2 percent weighted average tariff rate on goods into the US to one of 20 to 25 percent, before assuming any reversal of the reciprocal tariffs. If you look at all manufactured goods purchased in the US, about 37 percent are imported. This creates a big knock-on effect on US manufacturing purchases.
There are developments since April that are important to understand. Some are in the industrial space, and some are still in the policy space. The first is that many global companies are seriously evaluating increasing their manufacturing in the US. Many are also saying, “I need to pause. I can’t make major capital decisions right now because the environment is too uncertain.”
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Another development is that China and the US agreed to a 90-day pause in April. This pause lowered the tariff rate on Chinese goods into the US to 40 percent, from 145 percent. Consequently, we saw the shipping patterns change quite quickly. Shipping rates on containers essentially tripled right after that pause was announced. We’ll see what happens in the aftermath of the pause.
Additionally, the deadline for the moratorium on reciprocal tariffs is early July, and people are queuing up to try to make bilateral trade agreements, such as the UK trade agreement. It’s important to watch what’s happening in those trade agreements with different categories of goods because not all goods are the same. We encourage people to keep an eye on those categories of goods that are deemed important to national security—steel, copper, pharmaceuticals—as you likely will see very different treatments on those goods versus all other goods.
Scenario planning
Lucia Rahilly: Acknowledging uncertainties, how do you see the tariff situation evolving over, say, the next 12 months?
Shubham Singhal: The impact of these tariffs is meaningful to not only business cost structures but also demand patterns. Importantly, it’s not just about your own cost structure if your company moves. It’s the combination of where yours moves and where your competitors’ move, and what happens to the relative competitive advantage.
It’s important to look at a few tariff scenarios. One scenario is closer to 8 percent. This is where we have national-security-sensitive tariffs and assume some de-escalation continues with the US and China. Here the tariff level doesn’t go down to zero but is closer to 8 or 10 percent. The other end is the 29 percent scenario, in which we escalate again after these pauses. In the 15 percent scenario, some bilateral trade deals happen and some don’t. That’s a reasonable range too. Within that are other factors playing into the economy around productivity acceleration, AI, and the like.
There’s a discussion around fiscal reset in the United States that might be needed given the deficit, as well as central bank actions that might happen. Companies should look at those scenarios, understand what happens to the demand for their products, their cost structures, and their relative competitive advantage, and then decide how to move forward. Over the next 12 months, companies will begin to do that planning and have a sense of what actions to take as government negotiations continue.
Lucia Rahilly: Cindy, talk to us about how business leaders should be thinking about the overall macroeconomic context, given these variables.
Cindy Levy: You need to link your tariff scenarios to macro scenarios, given that the macro environment will be determined not only by tariffs: We also have a very big question about whether and when the US will move faster to take $1 trillion of spending per year out of the budget. Our economists see only $150 billion of that trillion announced so far, but there could be more fiscal reset to come.
If that comes, there would be an immediate recession but potentially a rebound three to five quarters later. If it’s delayed, then there could be a delayed recession. So it’s important to look at not only the tariffs but also some of the fiscal policies.
Companies should be looking at patterns of consumer and business demand, which are linked to tariffs but also broadly linked to expectations. A lot of the discussions we’re having with corporates are on not only the impact to their cost structures but also the demand erosion in what they produce in the near term. That determines the extent to which companies need to start executing on a number of resilience measures and how deep those resilience measures might need to be around cost prudence, investment prudence, et cetera.
Companies should be looking at patterns of consumer and business demand, which are linked to tariffs but also broadly linked to expectations.
Tracking trade patterns
Lucia Rahilly: Let’s go a little deeper into some of the market trends driven by tariffs and other geopolitical factors.
Cindy Levy: Let’s start with trade patterns, which is a question we get asked often. Companies will now need to understand trade patterns at a more profound level.
If you think about what tariffs do for any good or any product, they change the relative cost advantage of who is importing into the US. Take transportation equipment. China has about 20 percent import share, historically, on transportation equipment. With high tariffs, China likely gets priced out of that. European countries, Latin American countries, and other countries will be in a better cost position. Therefore, people relying on that transport equipment need to understand whether those alternatives to China have enough capacity. Are they gearing up for that capacity? If you are in transport equipment, you might think about putting your investment bets behind some of those countries that may now have an advantaged export position to the US. The way that trade might shift is something we’re speaking to many of our clients about.
Another conversation we’re having is about how to change your supply chain quickly and strategically, if necessary. How do you move a meaningful portion of your supply chain? Do you understand the maturity of other countries, whether in Southeast Asia or elsewhere? Buying microproduct to pick that up: How do you assess that? What does it mean for the level of involvement and the resources on the ground you need in those countries as you’re standing up a new supply chain?
Lucia Rahilly: If we could just stay on this a bit, any suggestions for leaders who are trying to convert these challenges into opportunities for their organization?
Shubham Singhal: In essence, the age of strategy is back. There’s so much uncertainty—so much that’s shifting—on advantage and demand patterns. When we look at industry leaders, there are three kinds of things they’re doing. I simplify it sometimes as, “Protect, prepare, and propel.”
First, leaders are mitigating downside. For example, within the US, Canada, and Mexico, there are no tariffs if you’re USMCA [United States–Mexico–Canada Agreement] compliant. Before, no one spent time making things USMCA certified, because it didn’t matter. Now they are doing that. Other tactical actions being taken include reviewing supply chains, using exemptions, optimizing logistics, et cetera.
Second, folks are preparing. They are looking at no-regret moves. There are action plans in place to ask, “Where can we optimize our GNA? Where can we get some operational efficiency? How can we shore up our balance sheets?” Those are all actions in the face of uncertainty that leaders are taking to position their organization to not only withstand shifts but really be able to move when the time comes.
Third, these moves include acting on their supply chain, their manufacturing, around new markets and around commercial activity. We’ve seen this in past moments of uncertainty. Those who not only are aggressive in getting more efficient and improving their balance sheet and capital position but also know where to lean into growth early on can win. That’s where the longer term comes in. As the uncertainty resolves itself, having those actions in place is what we see folks thinking about.
Those who not only are aggressive in getting more efficient and improving their balance sheet and capital position but also know where to lean into growth early on can win.
Playing with potential
Lucia Rahilly: Reflecting on the need for organizations to prepare to act, how can leaders take the potential impact of tariffs into account—specifically, in ways that inform the CEO agenda or their decision-making overall?
Shubham Singhal: I briefly mentioned earlier that we like to think about a relative advantage and what the change in demand looks like. One relative advantage that’s straightforward to understand is tariff cost impact. What is it for you and your competitors? Everyone has a different mix of products, a different set of geographies, and a different set of places where their products are sourced or manufactured, and that leads to different outcomes. Understanding that is important.
Other differences are related to access to certain markets, given some national-security-related factors. There can be an ability to source certain supplies. Those aspects of advantage are getting magnified significantly.
We find most organizations understand the impact on themselves, but many don’t seem to understand it relative to competitors. On the demand side in consumer markets, for example, it’s important to understand how consumers will react to pricing actions taken to adjust for cost increases. Will they move to substitutes? In that case, demand may go down for one product but go up for another one. In our surveys, we see consumers, particularly in the US, moving toward more value. If they move to more value, those value brands will see growth. Organizations should lean into that, even if overall demand gets dampened.
The words we typically use around the granularity of growth become important here. “Where is there going to be growth? What will be pulled back?” Certain trade corridors will grow, while others will retract. Are you positioned in those drawing corridors? And once you understand that, you can begin to ask, “For the businesses in my portfolio, where can I lean in? Where does M&A happen? Where does growth happen?”
Investment in commercial capabilities, investment in production capacity—those become the top right corner of a scenario visualization. If you are in the top left, you’re probably going to take price action to shore up margin because the demand pattern is less clear, and you’ll probably not make the investments that you want to. Being in the bottom left is where I think a lot of folks need to reconsider whether they want to be in those businesses or geographies or products. Being in the bottom right is where they must make hard-nosed decisions on whether they think the ROI exists to make the investment, remediate the disadvantage, or take a different action.
At the same time, it’s important to understand where your competitors are going to be taking action. We were looking at one industry with some large players and some boutique players. Some of the smaller ones wouldn’t be able to make the move. In that case, they would become candidates for acquisition. “If others are going to either exit markets or shed certain businesses, how do we position ourselves to lean into that?” And I think those are the much more strategic actions that companies are planning for and also need to be prepared to take.
Near- and long-term vision
Lucia Rahilly: Practically speaking, how can leaders organize to make these kinds of decisions, given ongoing flux?
Cindy Levy: In the near term, it’s essential that organizations can make fast decisions and are able to bring insights to those decisions in a structured way. Consequently, we see many setting up nerve centers.
These nerve centers can take on operational tasks but also be a source of insight to the rest of the organization on scenarios. As an example, some private equity firms have a nerve center to support tariff scenarios and economic modeling and to provide that insight to all their portfolio companies. It makes more sense to do it that way versus letting each portfolio company have an idiosyncratic or bespoke view on what might play out. Within the nerve center, it’s important to think carefully about the full perimeter of activities that might be valuable—to respond operationally, to Shubham’s point—but also to think about near-term resilience actions.
Again, there’s a lot of cash at stake in some of the near-term operational management opportunities. That’s not to be underestimated. Some organizations are bleeding millions a day because the products they’re importing haven’t been classified accurately. Shubham mentioned the lack of documentation on USMCA compliance, so they can’t get zero tariffs on items that should have zero tariffs.
They also might not have transfer pricing working in the right way. There might be product substitutes that they need to consider to reduce costs. If you set up a nerve center, you can create a category of these decisions and try to execute them quickly. There might also be near-term decision-making to take on pricing.
In terms of relative advantage, I spoke to one European industrial company that has US manufacturing, whereas its competitors do not. So its competitors will have much more of a cost experience issue vis-à-vis customers than it will. It’s starting to think about the time to grab market share and lock in long-term contracts because of the window of opportunity. How do you analyze that and tee that up for fast decision-making?
Geopolitical trends affect your near-term compliance management around tariffs: You don’t want to be caught out for not complying. They impact operations: What does the supply chain do? What does manufacturing do? Also, there might be a number of strategy calls you might have been about to enter, or maybe you’re considering putting capital into a country that has an unclear tariff scenario. You might need to immediately rethink that decision. Therefore, the enterprise needs a nucleus—a center of gravity—to help itemize and deliver against a diversity of decisions.
Trends beyond trade and tariffs
Lucia Rahilly: Taking an investor lens, any trends to highlight—new investable themes from policy tailwinds or value chain shifts?
Shubham Singhal: One we see emerging is on the industrial base, related to the increase in defense spending around the world—in Europe, Japan, and the United States. That’s a significant investable theme we’re seeing.
We’re also seeing capital spending gearing up. We’ve seen more supply chains move to India, for example, and out of China. Around eight years ago, we saw a lot of moves to Vietnam and Mexico. Following those, there was a lot of capital. More will move back to places like the US as well. It’s more high-end manufacturing and a lot more automation. And so again, we’re back to the technology theme and AI. Another round of capital spending needs to happen to be able to do that on a cost-effective basis.
How to make nerve centers work
Lucia Rahilly: What does talent look like for these nerve centers? Very practically, how do organizations make nerve centers a functional reality?
Cindy Levy: We learned a lot about the nerve center during the COVID-19 years. We see it as a cross-functional team where you bring expertise from around the enterprise to deliver on the different decisions that need to be taken.
Compliance, legal, operations, and logistics need to be in the nerve center. An interface that knows the supply chain should be there too. Some nerve centers have people from a central economics unit to anchor scenarios into one version of the truth and some commercial capability as well.
We do think there’s value in having the nerve center led by a full-time executive who could run a cadence of decision-making and make sure issues are elevated to the right levels of governance or the right management team for decision-making. We’ve also seen some good examples of trigger-based planning. The nerve center could say, “OK, what could happen? We might have higher Mexican tariffs for a while. We may get a re-escalation with China. What are we ready to do in some of those scenarios?” So it could have those diverse mitigation plans ready to go.
