Friend-Shoring: Balancing Global Trade Amidst Disruptions

In recent years, the global economy has been rocked by a series of trade disruptions, leading to a growing debate about the future of globalization. In response to these challenges, some US officials have advocated for a concept known as “friend-shoring.” This approach, while promising to enhance supply chain resilience, raises important questions about the potential consequences for the world economy. In this blog post, we will explore the concept of friend-shoring and analyze its pros and cons in the context of recent global developments.

What is Friend-Shoring?

Friend-shoring is a strategy aimed at encouraging companies to relocate their manufacturing operations away from authoritarian states and towards democratic allies. The primary goal is to reduce the economic leverage that countries like China and Russia hold over democratic nations by controlling key resources and products. It can be viewed as a milder form of “reshoring,” which involves bringing manufacturing processes back within a nation’s borders.

The US Initiatives in Friend-Shoring

Under both the Trump and Biden administrations, the United States has taken steps to promote friend-shoring. These efforts have primarily targeted the hardware supply chain’s relocation away from China. Major tech companies have either expanded their production sites in other parts of Asia or adopted the “China plus one” model, turning to Eastern Europe or Mexico.

Will Companies Embrace Friend-Shoring?

The willingness of companies to embrace friend-shoring remains uncertain. While some, like Apple Inc., have taken steps to reduce their dependence on China by diversifying production locations (e.g., producing iPhone models in India and expanding facilities in Vietnam), the scale of this shift is substantial. It’s estimated that it could take around eight years to move just 10% of Apple’s production capacity out of China. Moreover, the US still relies on China for a wide range of critical goods, including electronics, textiles, chemicals, and metals.

Who Stands to Benefit from Friend-Shoring?

Several nations could benefit from friend-shoring initiatives. The US Treasury Secretary has highlighted India’s potential as a significant center of manufacturing. President Biden’s visit to Vietnam also emphasized the growing economic relationship between the two countries. Additionally, countries like Indonesia, Malaysia, South Korea, Japan, Brazil, and various European nations could see increased investment and job opportunities as supply chains diversify. Such diversification could enhance business resilience to external shocks like wars, famines, political changes, or future pandemics.

The Potential Losers in a Friend-Shoring World

Friend-shoring primarily targets nations with economic regimes deemed to be unfair, such as China, and those that violate international norms, like Russia. The broader impact of widespread friend-shoring could extend to countries outside these categories. The World Trade Organization estimates that a disintegration of the global economy into separate blocs could reduce global GDP by approximately 5% in the long term. This would result in a less prosperous and less productive world, potentially reverting to trade levels observed before China’s accession to the WTO in 2001.

The Unraveling of Globalization

The rise of friend-shoring is emblematic of the challenges that have eroded the foundations of globalization in recent years. Tit-for-tat tariffs between the US and China, Russia’s invasion of Ukraine, and the subsequent sanctions have all contributed to this shift. Additionally, the US and China have formed new commercial alliances that exclude each other, signaling a changing landscape in global trade partnerships.

In conclusion, friend-shoring is a response to the growing complexities of the global economy. While it promises more resilient supply chains and economic security, it also raises concerns about potential isolationism and reduced economic growth. As the world grapples with these challenges, finding a balance between economic security and the benefits of globalization will be crucial for shaping the future of international trade.

This article was adapted from What ‘Friend-Shoring’ Means for the Future of Trade originally published by the Washington Post. More stories like this are available on bloomberg.com