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Friend-shoring: A boon or a bane?; By Jai Kumar Verma

Article Courtesy: Aviation & Defence Universe

Article 44/2022

Just before the world was hit by Corona virus and Covid -19 became the greatest global fear, a Morgan Stanley Research outlined how secular trends and trade tensions were, together, slowing globalization and potentially reversing it, in a concept that’s been referred to “slowbalization.”

It was 2019 and since then the humanity first suffered the onslaught of the pandemic and now it is in great trouble because of Russia Ukraine war. Not only this, the danger of Chinese attack on Taiwan is also looming large on the horizon.

Russia Ukraine war created wheat shortage and energy crisis in the world. These threats have not only disturbed the supply chain, even the production of several essential items was jeopardized. The supply of food grain, petroleum products including gas and other important items was disrupted. These catastrophes forced the western world to plan about rejuvenating the world economic order, so that the supply chain as well as production of essential items remain uninterrupted.

And then came the most famous speech given by US Secretary of the Treasury Janet Yellen at South Korean multinational LG’s Science Park of Seoul in July this year. She put forth the concept of ‘friend-shoring’ which means that trade should be restricted only to the dependable allies so that the threats to supply chains is minimized. The phrase ‘friend-shoring’ is akin to the concept of ‘onshoring’ and ‘nearshoring’ which means that production and supply chain should be either within the country or near the country. As the world has become a global village hence it is not feasible to produce everything within the country or very near to the country hence the idea is changed to ‘friend-shoring’ which would restrict the supply chain networks with like-minded and friendly countries. She appealed to the countries friendly to US that all should work together so that more robust supply chains between trusted and likeminded countries can be devised. Although Yellen made it clear that US is not deserting from world trade.

Friendship in need

Image Courtesy: Twitter/ @narendramodi

Yellen also mentioned that “Supply chain resilience is a key focus of the Biden-Harris Administration. The necessity of this work has been illustrated clearly by the events of the past two years – first by COVID-19 and our efforts to fight the pandemic, and now by Russia’s brutal war of aggression in Ukraine. Together, they have redrawn the contours of global supply chains and trade.” She further mentioned that “‘Friend-shoring’ is about deepening relationships and diversifying our supply chains with a greater number of trusted trading partners to lower risks for our economy and theirs.”

President Joe Biden also issued an order in 2021 to review American supply chains. The appraisal would suggest how to secure and strengthen the supply chains and in what manner US dependence on foreign supplies can be reduced.

Image Courtesy: Republic World

The notion of ‘friend-shoring’ would also reduce the overdependence on China. Beijing has emerged as the ‘world’s factory’. According to United Nations Statics Division statics China’s global manufacturing output was about 30 percent in 2018. China is world’s foremost producer of chemical fertilisers, cement, steel, machinery parts, clothing, textiles, and footwear. China’s economy is now the world’s second largest economy and claims that it would takeover US in few years. China is also threatening US’s lone super power status.

The analysts claim that strategy planners in US wants to curb the growth of China. According to recent study by an important think tank several companies would shift a quarter of their global product sourcing from China to other countries. The process of shifting from China to other countries was expedited because of pandemic, climate change and aggressive behaviour of China. Not only this countries like Vietnam, South Korea and India are providing several facilities so that these companies shift their factories from China to their countries.

US and other democratic countries are planning to shift production of critical items in friendly countries and extend trade with each other as they want to reduce dependence on China and Russia which have different values and systems. Although it is best if all things are produced and sold in the homeland but it is not feasible now, hence friendly countries and allies are included in production and in supply chains.

Image Courtesy: BBC

At present efforts are made to diversify the production units as pulling all manufacturing units from China is not feasible hence efforts are to reduce the dependence on China. Chinese exports increased after 2001 when Beijing joined World Trade Organisation (WTO) and started taking the benefits of it.

Under ‘friend-shoring’ if US supplies gas and rare earths to Europe and Europe sells semiconductor chips to Australia and Canada, the supply chain would certainly be stronger then purchasing these items from China and Russia. US and South Korea are old business partners and Biden administration wants to preclude China from controlling the technological industries. Hence it is promoting South Korea to produce semiconductors, batteries for electric vehicles etc. In his recent visit President Biden had visited a South Korean chip factory and would like to establish similar factory in Texas (USA). Proponents of ‘friend-shoring’ mention that the buyers should not only emphasize on price. They should view other considerations also.

The economists claim that ‘friend-shoring’ or ‘ally-shoring’ would damage the world economy as the global supply chains have reduced the tariffs, transportation, and communication costs. The production cost is lessened because the firms are allowed to purchase goods where it is more cost-effective. Manufacturing units are located in developing countries because of low-cost labour. The under-developed countries get the employment while the final products are less expensive hence even the poor persons in the developed world can purchase the product. The labour in the developing countries gain skill and after some time they manufacture more sophisticated items.

‘Friend-shoring’ may start the process of ‘deglobalisation’ which means higher prices in short run while lesser growth in long-term.

The friends do not remain friends all the time as Britain left European Union. Severe difference cropped up between US and Canada during the time of President Trump.

China would think many times before invading Taiwan because of its close trade relations with US and Europe but in case of ‘friend-shoring’ there would be a clear division between friends and foes. The economic dependence on countries of different ideologies may avert the battles.

Friend-shoring would be disastrous for poor countries as their economy would never rise. There would be mass exodus from the poor countries to wealthy countries which would create problems in developed countries too. The poor countries would become failed countries and extremism and radicalization would grow there and they would export terrorism.

If ‘friend-shoring’ is essential then it should be limited to essential and strategic items of national security only.

Way Ahead

The advocates of ‘friend-shoring’ claim that in pursuit of reducing the cost, the companies have ignored resilience which included climate disasters including floods, famines, earthquakes etc. Companies also discounted chokepoints. Hence companies should diversify their production plants in different countries.

Image Courtesy: Hindustan Times

The diversification is also essential because of change in policies of the country. The relations between US and China became tense when US under presidency of the then President Trump adopted tit-for-tat policy and imposed tariffs on Chinese goods. China also retaliated not only with US but imposed restrictions on Australian imports. Russia-Ukraine war has also disturbed the supply chain. It clearly indicates that in view of national security it is essential that strategic items should be produced either within the country, by friendly neighbours or countries with similar values and institutions. China which has emerged as a big economic power and now threatening several countries would suffer a setback. Several poor countries suffering because of China’s debt trap, may take a sigh of relief and if China’s economic strength reduces it would not lay debt trap to other countries. India may also be benefitted if more industries shift from China as few would certainly come to India.

(Jai Kumar Verma is a Delhi-based strategic analyst and Life Member of United Services Institute of India and member of Manohar Parrikar Institute for Defence Studies and Analyses. The views expressed are those of the author and does not reflect the views of C3S)
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