Date: Tuesday, September 12th, 2023
Over the past few years, the world has experienced an escalating series of trade disruptions: the US-China trade war, the Covid-19 pandemic and its supply chain disruptions, Russia’s invasion of Ukraine and the sanctions and export controls that followed. Their cumulative impact has called into question the vision of a globalized economy. In response, some US officials pushed “friend-shoring” — a happy-sounding name for a policy that would 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.
1. What would friend-shoring do?
Just as offshoring means moving work overseas to where production costs are low, friend-shoring means encouraging companies to shift manufacturing away from authoritarian states and toward allies. The goal is to prevent nations like China and Russia from leveraging their market advantages in key raw materials (such as “rare earth” minerals and magnets), products (energy, food, fertilizer) or tech-industry inputs to disrupt the US economy. Friend-shoring can be seen as a less extreme version of “reshoring,” or bringing key manufacturing processes back to within your own country’s borders. An early test of both strategies has come with electronics manufacturing.
2. What has the US done so far?
Starting under the presidency of Donald Trump, and continuing under President Joe Biden, the US leaned on companies to shift at least some of the hardware supply chain out of China. Major gadget assemblers have either set up new production or expanded existing sites in other parts of Asia, or turned to eastern Europe or Mexico in what’s commonly known as the “China plus one” model.
3. Are companies willing to go along with friend-shoring?
Time will tell. Apple Inc., which wants to reduce dependence on China, started producing some iPhone 14 models in India, and its largest supplier, Foxconn Technology Group, agreed to expand production facilities in Vietnam. But 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. The US still remains dependent on China for 276 types of critical goods, like certain electronics, textiles, chemicals and metals, according to an October 2022 report by asset manager Allianz Group.
4. Who would benefit from friend-shoring?
US Treasury Secretary Janet Yellen, during a November 2022 visit, emphasized India’s potential to become a more important center of manufacturing. Biden, in his recent visit to Vietnam, announced a series of semiconductor, aerospace and infrastructure deals to highlight what he called a “new stage” in the economic relationship between the two countries. Indonesia, Malaysia, South Korea, Japan, Brazil and European countries also could benefit as plants, jobs and investments move toward nations deemed sufficiently trustworthy by the US. Diversifying the geographic concentration of global supply chains would also help businesses become more resilient to external shocks like war, famine, political change or the next pandemic.
5. Who would lose out?
The US-led effort is mainly targeted at economic regimes like China that the US sees as unfairly supporting their domestic industries and at nations that violate international norms, like Russia. (Many Western companies have already unwound investments in Russia in the wake of its invasion of Ukraine in early 2022.) The impact of a widespread friend-shoring push would likely be felt even by countries that don’t fall into one camp or the other. The World Trade Organization estimates that a disintegration of the global economy into separate blocs could reduce global gross domestic product by about 5% over the long term. This would result in a significantly poorer and less productive planet, with trade back at levels before China joined the WTO in 2001.
6. What happened to globalization?
Tit-for-tat tariffs imposed by the US and China during Trump’s presidency remain in place. Russia’s invasion of Ukraine — and China’s refusal to condemn it — further undid decades of globalized commerce, as did the sanctions imposed on Russia by the US, the UK and the European Union. The Biden administration has ratcheted up curbs on chip companies’ exports to China. And the US and China have formed new commercial alliances that exclude each other. The China-led Regional Comprehensive Economic Partnership (RCEP), which took effect at the start of 2022, is now the world’s biggest free-trade area. The US is forming its own regional partnership, the Indo-Pacific Economic Framework (IPEF). Those are in addition to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which moved ahead after the US pulled out in 2017 from what was then called the Trans-Pacific Partnership, or TPP.