What do the Friends of Friend-shoring Think Its Rationale Is?



Halit Harput | St.Gallen Endowment for Prosperity through Trade

Senior US policymakers are advocating friend-shoring—but they haven’t been consistent in the use of that term. Nor have they explained why private sector incentives to blunt supply chain disruption aren’t strong enough.

In recent years, there have been calls for onshoring, reshoring, and near-shoring of supply chains. A year ago, the Biden Administration first mooted friend-shoring. Now US officials appear to be putting flesh on the bone.

At the Atlantic Council on 13 April 2022, US Treasury Secretary Janet Yellen observed “in the aftermath of the pandemic, that our supply chains, while having become very efficient and excellent at reducing business costs, have not been resilient.” Yellen contended that friend-shoring was part of the solution. On this occasion friend-shoring was built on trusted trading partners: “that we have a group of partners… [with whom] we’re not worried about geopolitical issues. We know that we can count on them, rather than take a purely domestic approach. I think we get the benefits of continued efficiencies in production by having a group of partners who work to shore up supply chains and make them more resilient.”

More recently in July 2022, in a speech made at LG’s Science Park in Seoul, Ms Yellen emphasised that friend-shoring is not about retreat from global supply chains: “Working with allies and partners through ‘friend-shoring’ is an important element of strengthening economic resilience while sustaining the dynamism and productivity growth that comes with economic integration. 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.”

Other US officials frame the matter differently— putting more emphasis on encouraging domestic production, which could substitute for imports. For example, in recent statements US Commerce Secretary Gina Raimondo promoted friend-shoring explaining that, as far supply chains are concerned, the US is “taking a dual approach, investing in domestic manufacturing, as well as pursuing ‘friendshoring’ like-minded partners fully integrated into our supply chains.” At the World Economic Forum meeting in Davos in May 2022 Secretary Raimondo framed the matter differently noting “we can’t make everything in America”, and concluded that if “it can’t be in America—because of labour prices and the like— it ought to be on our allied shores.” So it seems encouraging factories to move out of geopolitical rivals is part of the agenda too.

A careful review of statements made by senior Biden Administration officials on friend-shoring reveal little, if anything, about the tangible steps they plan on taking to advance this policy goal. As the second paper in this series shows, most of the steps devised to date have come from Congress.

What are America’s trading partners to make of friend-shoring? Is the Biden Administration at one on the ends and means of friend-shoring? Is it old wine in new bottles? And, what is the problem friend-shoring in really trying to solve? Each question is briefly addressed in turn.

Are the proponents of friend-shoring aligned?

It is no secret that internationalist wing of the Biden Administration is at odds with the wing that wants to promote import substitution and further condition access to the U.S. market. The semipublic debate between U.S. officials over the merits of reducing import tariffs on Chinese imports revealed that.

Find further timely analyses on globaltradealert.org/reports 2 of 2 Those fissures are apparent in statements over friend-shoring, in particular as they relate to the boundaries of this new policy. Divisions over the implications of national security for friend-shoring can be expected. In respect of supply chains, Secretary Yellen has said it is “increasingly difficult to separate economic issues from broader considerations of national interest, including national security”.

Similarly, Secretary Raimondo said, “Some things are more important than price. You can’t put a price on America’s national security”. However, it seems that in certain instances full repatriation of production to the United States—not friend-shoring—is the goal. For “critical” goods, such semiconductor chips, Secretary Raimondo said: “It is a huge national security issue and we need to move to making chips in America, not friend-shoring.” How different are these comments to those of Dr. Peter Navarro, a senior White House official in the Trump Administration?

Is friend-shoring new?

Friend-shoring has antecedents in U.S. trade policy. Favouring allies with free trade agreements was a key part of the “Competitive Liberalization” strategy of the Administration of President George W. Bush. For sure, the goal was opening markets abroad to U.S. companies. But like friend-shoring argument, there was considerable emphasis on the track record foreign and security policy cooperation with selected foreign governments. Seasoned trade hands will recall that Australia was bestowed a FTA but New Zealand was not.

But the accusation of “old wine in new bottles” can only be taken so far. A crucial difference between the Bush and Biden Administrations is that the former was open to not only negotiating binding free trade agreements but to fighting for the Congressional approval of the resulting accords. Another difference: the form of discrimination in regional trade agreements is explicit—in the case of friendshoring we are still to learn what carrots and sticks the Biden Administration will use to induce factories to move.

Why hasn’t friend-shoring happened already?

Advocates of friend-shoring have not explained what market failure they want to fix with friendshoring policies. Recently, one of America’s leading international trade economists forcefully made this point. Professor Gene Grossman of Princeton University observed: “Supply-chain disruptions have become the new normal since the pandemic began. Many politicians and commentators blame globalization and believe that governments should be taking actions to encourage firms to diversify their supply sources and to bring sourcing closer to home. But firms have their own incentives to avoid disruptions, so it’s not obvious that their investments in resilience will be sub-optimal without government policy intervention.”

In a recent paper with two co-authors, Grossman notes “Little is known about optimal policy in the face of insecure supply chains.” Their analysis makes two important points. First, that the optimal public policy for supply chains depends on factors that governments are very unlikely to observe. If governments can’t observe what to condition policy on, then how can they be sure that their friendshoring policies won’t do more harm than good? And, second, that the private sector can over-invest in resilience. Policy based on assumptions that under-investment is the norm is flawed.

In short, the proponents of friend-shoring—some of whom are leading economists in their own right—haven’t played by the rules of the game when advocating public policy. They haven’t stated what steps the state should take and they haven’t explained what market failures those actions will fix. For those hoping for a return to rational, evidence-based U.S. trade policymaking, to date friend-shoring pronouncements by the Biden Administration have been a disappointment.

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.

Please send comments or suggestions to halit.harput@sgept.org. This is the first of three assessments.

To read the original briefing, please click here