What Friendshoring Means for Global Supply Chains



James Gordon | Raconteur

The Biden administration’s latest geopolitical strategy is to prioritise trading with ‘trusted allies’. But in a highly complex and interconnected world, would such a move even work?

Free trade has never looked so sickly. Geopolitical tensions, including the US-China trade war and Russia’s invasion of Ukraine, have infected global trade relations. Coupled with the lingering disruption of Brexit and Covid-19, these rows threaten to severely disrupt global supply chains.

The cure? Well, recognising that trade and geopolitics are inextricably linked, the Biden administration has created a new policy to treat the supply chain risk. The diktat, which it has named friendshoring, involves only trading with trusted allies.

But the strategy raises several concerns. Firstly, how does the US propose to differentiate a ‘friendly country’ from an ‘unfriendly’ one? In addition to its traditional allies, the Biden administration has identified Brazil, India, South Korea, Japan, Indonesia, Vietnam, and Malaysia as trustworthy nations.

But there are grey areas. Hungary, for example, is part of the EU, which is regarded as a friendly trading bloc in the US administration’s eyes. Yet US think-tank Freedom House only classes Hungary as being “partly free”, given Viktor Orban and his government’s frequent attacks on democracy, the rule of law, press freedoms and LGBTQ+ rights. What does it mean, then, for the US to indirectly call Hungary a ‘trusted ally’, then?

Finding alternatives to Made in China

Even if the US can fine-tune who it considers a trusted ally, and if its companies embrace the concept of friendshoring, can the emerging industrial powerhouses on the US list prove to be a viable substitute for Chinese manufacturing bases?

Jose Arturo Garza-Reyes, professor of operations management at the University of Derby, says that the aforementioned countries “are rapidly becoming part of the top 15 most competitive nations for labour-intensive commodity products”. In the short- to medium-term, he believes that “supply chain agreements formed with China can be replaced with agreements with these countries”.

But in the long term he worries that friendshoring could create a world divided between free-market democracies and authoritarian regimes. Garza-Reyes is particularly concerned that friendshoring could take the world back to similar trading characteristics last seen during the Cold War, creating ‘trade blocs’ where some countries are aligned to autocratic states such as China and Russia, and others to Western nations.

“This could exacerbate the already high friction between these blocs,” he says, “making the friendshoring policy a dangerous one. From an operational point of view, this would limit the partnerships and relationships that companies can develop, preventing them from being able to procure the best products, services and raw materials at the lowest cost. Once again, from an operational perspective, this makes friendshoring an undesired, but currently politically necessary policy.”

A necessary cost to bear?

If a policy of friendshoring divides the world into separate trading blocs, it is unclear what economic impact it would have. One estimate from the World Trade Organization suggests that GDP could take a hit of up to 5%.

Emily Benson, a senior fellow at the Center for Strategic and International Studies (CSIS), agrees that this is a risk, but says that the policy of friendshoring “does not necessarily preclude deeper market access for non-aligned nations”.

She explains: “The US government is not saying that it will not allow goods into North America. It is affirmatively trying to build more partnerships with countries that have critical inputs for US supply chains.”

But perhaps the most important question of all is that with China being deemed an unfriendly nation by the new policy, will global corporations like Apple, which are heavily reliant on China for manufacturing, up and leave? According to Bloomberg Intelligence, around 98% of iPhones are made in China, and it would take the company about eight years to move just 10% of its production capacity out of China.

So how can the US administration persuade companies with large Chinese manufacturing bases to relocate to ‘friendlier’ climes? Options include offering subsidies or tax breaks to set up in countries which are considered trusted allies, placing tariffs on goods manufactured in China (as it did in the recent US/China trade war), or simply stopping US companies from buying from or selling to unfriendly nations.

Benson, who recently co-authored a report called The Limits of “Friend-Shoring”, says: “It’s much more nuanced than that and very sector-specific. Some industries such as the defence sector, which demand total transparency and visibility across their entire supply chain, will openly embrace friendshoring, while other sectors will find it more difficult to uncouple themselves from their Chinese manufacturing bases.”

Would friendshoring even work?

But will tariffs succeed in encouraging companies to shift to friendlier nations? Dr Heather Skipworth doesn’t think so. Skipworth, an associate professor in supply chain management at the Cranfield School of Management, points to a study she co-wrote two years ago which featured an interviewee from the automotive industry. This interviewee told Skipworth that “tariffs on steel and aluminium would need to be significantly higher than 25% to justify switching from a brake motor supplier in northern China to a domestic US supplier”.

From an operational point of view, friendshoring would limit the relationships that companies can develop

Skipworth adds: “In the end, our research revealed that it wasn’t necessarily tariffs that persuaded companies to move their supply chains away from China. Instead, we identified three factors – institutional pressures (which includes tariffs), supply chain mobility, and the perceived severity of the potential disruption risk – as the keys to supply chain design. In my view these characteristics could prove to be the main determinants of whether the friendshoring policy is followed.”

But for Garza-Reyes, tax breaks and subsidies may indeed have a role to play to “facilitate and support the reconfiguration of supply chains in the short and possibly medium term”. That said, he adds that the opportunity cost will be “an increased cost in the operation of the supply chains and the products, services and raw materials they procure”.

Why a gradual shift is on the cards

In the long term, both Garza-Reyes and Benson expect companies which have invested heavily in China to see the bigger picture and move their supply chains elsewhere.

As Garza-Reyes puts it: “I believe that most companies will still voluntarily follow this option as they know that doing business… with companies from unfriendly nations increases the risk of serious disruptions in their supply chains and operations.”

Benson agrees, adding that “over time the cost of labour in China will become more expensive. It may become more difficult for foreign companies to operate there due to a combination of higher labour costs and a more difficult political environment. It is therefore incumbent upon companies to determine which locations are competitive in terms of lower production costs and other efficiency gains, such as IP protections and overall ease of doing business.”

Such a shift would by no means signal the end of the global supply chain economy, but it underlines the increasingly important role that state-led commercial alliances and regional partnerships will play in future trade discussions.

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