Trade Wars

What Friend-Shoring Means for Trade in a Less Friendly World

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Over the past few years, the world has seen a growing series of trade disruptions – the US-China trade war, the Covid-19 pandemic and the supply chain disruptions it has caused, Russia’s invasion of Ukraine and duels over sanctions and export controls. who followed. Their cumulative impact has challenged the vision of a globalized economy. In response, some U.S. officials are pushing “friend-shoring” — a label that rings gleefully for a world divided between free-market democracies and countries that align themselves with authoritarian regimes from China or Russia. It’s a world in which supply chains could be more robust and less subject to economic blackmail. It’s also probably a poorer and less productive world.

1. What is friend shoring?

US Treasury Secretary Janet Yellen has proposed buddy relocation as a way to insulate global supply chains from external disruption or economic coercion. The idea is that a group of countries that share common values ​​deploy policies that encourage companies to spread manufacturing within that group. The goal is to prevent less like-minded nations from unfairly exploiting their market position in key commodities, technologies, or products to disrupt the U.S. economy or that of its allies. It’s one of many variations on the term offshoring – the large-scale push by companies at the turn of the century to move what operations they could to places where it was cheaper to operate. Another iteration is “re-shoring”.

2. What is an example of something friend-shore?

The United States aims to reduce dependence on authoritarian regimes for key commodities such as rare earths, magnets, and other items that can be adapted for military use. The push will also seek to diversify away from Russian suppliers of essential commodities, especially energy, food and fertilizers. In some areas, such as semiconductors, the idea is to diversify sources between friendly nations. The United States relies heavily on Taiwan, which faces security pressure from mainland China; the United States has recently stepped up its chip engagement with South Korea.

3. Who would be the winners of the friend-shoring?

Indonesia, Malaysia, Vietnam and other Indo-Pacific countries would likely benefit as production plants, jobs and investment move to countries deemed “trustworthy” by states. States and their allies. Diversifying the geographic focus of global supply chains will also help businesses become more resilient to external shocks like wars, famine, political changes or the next pandemic.

The US-led effort primarily targets non-market economy regimes like China, which the US sees as unfairly supporting its domestic industries, and countries that violate international norms, like Russia. These countries would see an economic hit as investment and jobs shift to other regional trading partners. And, of course, there would be repercussions for countries within a friendship alliance.

5. What would be the impact?

A process that some call de-globalization and others call decoupling would likely lead to short-term supply shocks and higher prices – developments similar to those produced by the turbulence of recent years. In the long run, the result is likely to be lower economic growth due to loss of efficiency, higher costs and supply bottlenecks. That’s why Yellen expressed hope that China would take Western human rights and national security concerns seriously, in order to “preserve the benefits of deep economic integration with China – without going towards a bipolar world”.

• A 2020 Newsweek column credited a USAID official with coining the term “allied-shoring.”

• Yellen’s speech in which she described having friends.

• An article and a series of charts from Bloomberg Economics outlining the prospects and costs of de-globalization.

• An article examining what the World Trade Organization thinks Russia’s invasion of Ukraine will affect world trade.

More stories like this are available at bloomberg.com