Although the spotlight in recent weeks has been on policy developments in the United States, other nations have taken initiatives that smack of friend-shoring. This briefing describes the state of play as of August 2022.
When it comes to friend-shoring, the Biden Administration has willed the ends but not specified the means. Instead, a patchwork of executive and legislative initiatives have been taken—some of which may induce production relocation to allies, while others are tantamount to subsidy-induced import substitution. Developments in other trading powers suggest alternative approaches are feasible, as this note makes clear.
As U.S. Commerce Secretary Gina Raimondo has noted, the United States has been taking “a dual approach” in tackling supply chain disruptions and strengthening economic resilience – “investing in domestic manufacturing, as well as pursuing ‘friend-shoring’ like-minded partners fully integrated into our supply chains.” In this regard, several high-profile initiatives have been enacted or announced in recent months.
CHIPS and Science Act
One high-profile initiative to address supply chain disruptions will follow the signing into law of the CHIPS and Science Act of 2022 (CHIPS Act) in 9 August 2022. With the CHIPS Act, the U.S. extended substantial financial incentives having a total value of USD 52.7 billion to participants in the American semiconductor supply chain. The majority of this funding (USD 39 billion) took the form of manufacturing incentives. In addition, the CHIPS Act provided a 25% investment tax credit for capital expenses when manufacturing semiconductors and associated equipment.
The CHIPS Act primarily sought to encourage the onshoring of manufacturing of semiconductors. However, the Act also included provisions prioritising partnerships with allies and steps to weaken commercial ties with China. Specifically, the Act allocated a USD 500 million to coordinate with foreign governments to support cooperation in secure semiconductor supply chains as well as in the development and adoption of secure telecommunications networks. In this context, Secretary of State Antony Blinken said “this fund will help deepen efforts with key allies and partners in alignment with this historic domestic investment in these critical technology areas.” He further argued that “[the CHIPS and Science Act] is an important step to further prepare our economy for the 21st century and strengthen our regional supply chain diplomacy, including through the U.S.-EU Trade and Technology Council, the Indo-Pacific Economic Framework, and the Americas Partnership for Economic Prosperity.” Apart from the incentives, the Act established guardrails that prevent the recipients of the federal funds from expanding semiconductor manufacturing capacity in countries that present a national security concern to the United States for 10 years.
Inflation Reduction Act
Just a few days after the enactment of CHIPS Act, on 16 August 2022, President Biden signed into law the Inflation Reduction Act (IRA) of 2022. Arguably, the IRA has friend-shoring elements. The IRA extended and revised a number incentives to related to climate change and energy security, including a number of tax credits and funding to support the production of electric vehicles (EVs), renewable energy technologies, critical minerals. The incentives have an estimated value of USD 369 billion.
Find further timely analyses on globaltradealert.org/reports 2 of 4 Similar to the CHIPS Act, IRA included safeguard provisions against China as well as stronger provisions promoting ‘friend-shoring’ relating to the manufacturing processes as well as sourcing of the materials. More specifically, concerning the tax credits to be provided to electric vehicles (‘EVs’), only vehicles whose final assembly occurs in North America are eligible for the tax credit.
The IRA also included a provision that prohibited manufacturers from benefiting from a tax credit unless they satisfy critical mineral and battery component requirements. Specifically, manufacturers can claim a tax credit if 40% of critical minerals contained in battery “(i) extracted or processed; (a) in the United States, or (b) in any country with which the United States has a free trade agreement in effect; or (ii) recycled in North America”. That sourcing percentage would increase to 80% by 2027.
In terms of battery components, a tax credit can be claimed by an EV manufacturer as long as a 50% of “the value of the components contained in such battery (…) manufactured or assembled in North America”. The percentage would increase to 100% by 2027. On top of this, EVs are barred from a tax credit if any of the battery components including critical minerals were sourced in countries that present a national security concern to the U.S.
Upon the passage of IRA, the Alliance for Automotive Innovation which represents automakers producing over 95% of vehicles sold in the U.S. argued that it will be difficult for the sector to meet the new conditions. Specifically, the CEO of the Alliance for Automotive Innovation John Bozzella has written that of the existing 72 EV brands currently available: “Seventy percent of those EVs would immediately become ineligible when the bill passes.”
Mr. Bozzella also complained about ‘selective’ friend-shoring introduced by IRA and argued that the U.S. is incapable of supplying sufficient critical materials and batteries domestically. In his view, the friend-shoring in the IRA does not go far enough. He proposed the following reform: “Expanding the definition of eligible countries from which batteries, battery components and critical minerals can be sourced to include nations that have collective defense arrangements with the United States, like NATO members, Japan and others. Broadening the list of eligible countries will provide more options to more quickly reduce our reliance on China.”
Defense Production Act
American officials often argue that shortages of critical minerals and materials are one source of vulnerability in U.S. clean energy supply chains. The demand for critical minerals has been rising and is projected to rise further in the coming decades. Meanwhile, the mining and processing of these minerals is seen as dominated by adversaries. To tackle with these vulnerabilities and to strengthen resilience, in the recent months, the Biden Administration has invoked the Defense Production Act (DPA) and authorised a number of subsidies to strengthen the domestic industrial base for these minerals and materials.
The DPA Title III program provides the President a broad set of authorities to ensure the timely availability of essential domestic industrial resources that are critical for national security. However, existing DPA provisions don’t allow outward funding such as developing new mines in foreign countries. For this purpose, the U.S. Department of Defense (DoD) asked Congress to amend the DPA to allow Pentagon to fund projects in the U.K. and Australia that process strategic minerals used to make electric vehicles and weapons. DoD said in its request to Congress that making Australia and UK eligible for funding under the DPA would “allow the U.S. government to leverage the resources of its closest allies to enrich U.S. manufacturing and industrial base capabilities and increase the nation’s advantage in an environment of great competition.” These legislative requests were complemented by the following ‘friend-shoring’ initiative.
Minerals Security Partnership
On 14 June 2022, the United States together with ‘like-minded’ countries, established the Minerals Security Partnership (MSP) with the purpose of creating their own supply chains in critical minerals. The goal was to “ensure that critical minerals are produced, processed, and recycled in a manner that supports the ability of countries to realise the full economic development benefit of their geological endowments.”
Previously, in June 2021, critical minerals and materials were identified in a report by the Biden Find further timely analyses on globaltradealert.org/reports 3 of 4 White House as one of the key products subject to supply chain vulnerabilities along with semiconductors, batteries, and pharmaceuticals. And for these products, it is stated that “the United States must work with allies and partners to diversify supply chains away from adversarial nations”. In fact, in that report the term ‘friend-shoring’ was used for the first time. The MSP initiative can be regarded as the realisation of some of that report’s objectives.
There were antecedents to this Biden Administration move. In his first year of his presidency, in 2017, President Trump issued Executive Order on critical minerals directing the relevant agencies to look for “options for accessing and developing critical minerals through investment and trade with our allies and partners”. Later, in 2020, Trump Administration, acknowledged that “reliance on critical minerals from foreign adversaries constitutes an unusual and extraordinary threat to the national security, foreign policy, and economy of the United States.” President Trump declared a national emergency with the Executive Order on Addressing the Threat to the Domestic Supply Chain from Reliance on Critical Minerals from Foreign Adversaries. One of the policy objectives of the Executive Order was to “reduce the vulnerability of the United States to the disruption of critical mineral supply chains through cooperation and coordination with partners and allies” as well as to “build resilient critical mineral supply chains, including through initiatives to help allies build reliable critical mineral supply chains within their own territories”. In short, the term ‘friend-shoring’ may be new, but key characteristics of this approach can predated the Biden Administration.
Other international initiatives taken by the United States
Apart from MSP, in the recent months, the US announced several international initiatives including Indo-Pacific Economic Framework for Prosperity (IPEF) in May 2022, and revitalised the U.S.-EU Trade and Technology Council (TTC) to promote friend-shoring as a fix to supply chain vulnerabilities. The underlying logic in these initiatives is “to collaborate to reduce dependencies on unreliable sources of strategic supply, promote reliable sources in our supply chain cooperation, and engage with trusted partners.” Also, the U.S., Australia, Japan and India (Quad) have committed to develop Rare Earths projects and technologies to challenge China’s dominance in the sector. This partnership will involve loans to mining and refining businesses.
EU: Region-wide subsidies to build capacity in selected sectors
On the other side of Atlantic, the EU has been utilising its Important Projects of Common European Interest (IPCEI) programme to strengthen its “strategic autonomy” and to pursue the goal of supply chain resilience. As of this writing, the European Commission approved three IPCEI projects relating to the microelectronics, batteries, and hydrogen supply chains. Rather than any one EU member state trying to establish each stage in a value chain, “IPCEIs make it possible to bring together knowledge, expertise, financial resources and economic actors throughout the Union.” Since EU member states are by definition allies, these projects embody the essence of friend-shoring—although IPCEI projects have not been characterised in those terms. Still there are limits: the EU acknowledges that IPCEI projects cannot alone solve the dependency on key raw materials.
Furthermore, on 8 February 2022, the European Commission proposed adoption of a European Chips Act, seeking to mobilise more than EUR 43 billion funds through to 2030 with an eye to strengthening semiconductor value-chains within the EU. Specifically, the Act will address semiconductor shortages in the EU and improve EU resilience to supply chain disruptions by building more production capacity. As a result, the EU aims to become more self-sufficient in semiconductor manufacturing and has set a goal of increasing its market share of semiconductor manufacturing from 9% to 20% by 2030. While targeting “reducing excessive dependencies”, the European Chips Act also included friend-shoring component by proposing “building semiconductor international partnerships with like-minded countries”.
Japan: Paying factories to move our of China – home and to South East Asia
Japan adopted a high-profile scheme during the COVID-19 pandemic that appeared to have a Find further timely analyses on globaltradealert.org/reports 4 of 4 friend-shoring element. The underlying logic is familiar: it was argued by Japanese politicians that certain supply chains were over-reliant on sourcing from China. In this context, Cabinet chief secretary Yoshihide Suga highlighted the importance of resilience and said: “We must avoid being overly dependent on certain countries for products or materials and we have to repatriate production sites for the goods necessary for daily life.”
To try to address this apparent problem, Japan created a USD 2.2 billion fund for the relocation of production from abroad, particularly from China, back home or to South East Asian nations. In principle, then, this initiative has a friend-shoring dimension. However, three pertinent facts arose during the implementation of this initiative. First, that the average subsidy payment per recipient was small (around $15 million) and therefore unlikely to materially affect commercial calculation for large scale production facilities. Second, that the Japanese government differentiated between awards to firms to relocate production for goods largely sourced from abroad and awards to firms to build up local production in general. The former are onshoring initiatives while both substitute for imports. And, third, that little or no funding was provided to relocate factories to South East Asia.1 The subsidy limit for the latter was a tenth of the size of that for relocating production to Japan.
Leading Western economic nations are now developing initiatives with friend-shoring components. This is not to imply that the mutual support between “allies” is central to the design and execution of the supply chain initiatives reviewed here. Nor is there any implication of that a grand strat1 For a discussion of this Japanese initiative see chapter 5 of the 27th Global Trade Alert report, available at https://www.globaltradealert.org/reports/75. egy has emerged to marginalise or otherwise denude certain nations of productive capacity. That may well come.
Still, now that these Western initiatives are underway the policy-related content of friend-shoring is coming into focus. For now, by and the large, Western governments are using carrots rather than sticks to advance friend-shoring. Whether that policy mix is sustained will have an important bearing on whether the world trading system fragments further into groups, in particularly in sectors deemed sensitive.
Halit Harput is Senior Trade Policy Analyst at the St.Gallen Endowment for Prosperity through Trade. For the Global Trade Alert initiative he reports on trade-related policy changes by several nations, including the United States. Previously, Halit served as an official in the Turkish Ministry of Trade. He thanks Simon J. Evenett and Johannes Fritz for their comments and guidance on earlier drafts of this note.
To read the full briefing, please click here.