According to a recent article by Bloomberg, friend-shoring is being pushed by some US officials following the significant impact of the US-China trade war, Russia’s invasion of Ukraine and pandemic supply chain disruptions.
But what is ‘friend-shoring’ and what does it mean for trade outlook?
Friend-shoring is when a government encourages businesses to restructure supply chains and move production away from countries deemed ‘geopolitical rivals’, in favour of political and economic allies.
This would essentially prevent disruption to a country’s economy by preventing other nations from leveraging their market advantages – but there are both pros and cons.
According to Bloomberg, friend-shoring could “lead to a world divided between free-market democracies and countries that align with the authoritarian regimes of China or Russia. It’s a world in which supply chains could be more robust and less subject to economic blackmail. It’s also likely a world that’s poorer and less productive.”
Meanwhile, in a recent article The Economist said: “Friend-shoring is similar to nearshoring, which moves production closer to home. Both policies aim to strengthen trade security. They have a cost: when politics rather than profit determines where goods are made, production is likely to be less efficient. But advocates argue that the price is worth paying to reduce countries’ dependence on hostile powers.”
The US set the ball rolling under Donald Trump’s presidency, which has continued under Joe Biden’s leadership, by leaning on companies to move some of their hardware supply chain out of China.
Apple made the decision in 2022 to manufacture its flagship iPhone 14 model in India, while toy giant Hasbro has shifted away from China in favour of India and Vietnam.
US Treasury Secretary Janet Yellen said last year: “Rather than being highly reliant on countries where we have geopolitical tensions and can’t count on ongoing, reliable supplies, we need to really diversify our group of suppliers.
“Friend-shoring means…that we have a group of countries that have strong adherence to a set of norms and values…and we need to deepen our ties with those partners and to work together to make sure that we can supply our needs of critical materials”, she added.
However, it remains to be seen how friend-shoring will progress.
Bloomberg Intelligence estimated last September that it would take “about eight years” to move just 10% of Apple’s production capacity out of China, where roughly 98% of the company’s iPhones have been made.
Supporting such estimates, The Allianz Group reported in October 2022 that the US still remains dependent on China for 276 types of critical goods, and 141 types of goods for the EU.
It explains that computers & telecom, electronics, household equipment, metals, autos & transport equipment, chemicals and machinery & equipment are the most globalised sectors, with most exhibiting a strong exposure to China. Together, they account for more than 50% of global trade.
Closer to home, an article from The Strategist says that friend-shoring has become “central to Australia’s critical minerals policy in the past few years.
“Australia can’t easily replicate something like the US IRA in scale. We also can’t directly copy its friend-shoring mechanism of subsidising ties with free-trade agreement partners, because we have an FTA with China. We can and should, however, adopt the general approach of offering tangible rewards for industry members that form politically desirable cross-border ties. We also shouldn’t shy away from seeking a greater share of the economic pie while doing so”, it added.
So, who will benefit from friend-shoring and who’s set to lose out?
India could well become an important manufacturing centre, according to Yellen.
During a visit to New Delhi in 2022, she said: “We are proactively deepening economic integration with trusted trading partners like India.”
Meanwhile, Vietnam recently saw a $7.8 billion deal between Boeing and Vietnam Airlines, which was announced by The White House during a visit from President Joe Biden.
At the time, Biden said: “Today, we can trace a 50-year arc of progress in the relationship between our nations, from conflict to normalisation.
“This is a new elevated status that will be a force for prosperity and security in one of the most consequential regions in the world”, he added.
Research from the Allianz Group suggests that Mexico, South Korea, Japan, Vietnam, Indonesia, Brazil and Malaysia could be “the best positioned as ‘friend-shoring candidates’ for closer trade relations with the US and the EU. But the US and the EU could also look to increase bilateral trade cooperation.”
On the flip side, the countries set to feel the consequences of targeted friend-shoring efforts are likely to be China and Russia, with the Allianz Group reporting that China has already started to lose market share in US imports since 2018 and the trade war, in part to the benefit of Asian competitors.
The World Trade Organization estimates a reduction of global gross domestic product by about 5% over the long term, due to the disintegration of the global economy into separate blocs.
Bloomberg reports that this would result in “a significantly poorer and less productive planet, with trade back at levels before China joined the WTO in 2001.”
Meanwhile, in a recent article the World Economic Forum warned: “The practice has stoked concern within the international community about the possibility of further geo-political fragmentation and deglobalisation of the world’s economy – the decline of interdependence between nations, global institutions and enterprises.”
This begs the question for supply chain managers – are you prepared for the possibility of seeking out politically desirable ties?
