Friendshoring supply chain

Is Friendshoring supply chain the future of businesses?

We are almost seven months into the war in Ukraine and our world’s focus has been static. We are preoccupied with the same problem, soaring energy prices, growing food shortages, depleting gas reserves, all near term outcomes of the war. You don’t seem to bother about the bigger picture, long term implications that could change the world order decisions that could impact the rules of global conduct.

Case in point, there are two statements made by the US Treasury secretary, the chief financial officer of the United States if you like. In April, she delivered an online address she asked like-minded countries to follow the policy of Friendshoring to insulate their supply chains from threats. In July she stressed on the strategy once again, this time she asked trusted American allies to Friendshore their investments and insulate their supply chains. So what was she talking about?

What is Friendshoring?

As the name indicates, it simply means offshoring trade to countries that you can call friends. This is a time tested business strategy. First, you move businesses from hostile countries to friendlier ones, then you confine commerce to a limited circle of trusted partners. This is what the Americans mean when they say frienshoring. The question is why do they want to do this? What’s in it for them? What’s in it for their allies and how could it change our world?

America wants to friendshore its investments, it wants to do business only with its friends, Countries that shares values with or governments, it considers allies. Why does it want to do this? To secure its supply chains to lower economic risks, to extend market access, and to counter China and Russia!

The turbulent events of the last three years like Donald Trump’s trade war with China, Russia’s weaponization of food supplies, the threat of China invading Taiwan, the pandemic induced slowdowns, they’ve all disrupted the global economy. They’ve exposed the risk of offshoring jobs.

How an unexpected catastrophe in one part of the world can empty shells and supermarkets in another part of the world? How one country can unfairly leverage its market position, weaponize the supply of key resources, and disrupt economies that depend on it. According to some interesting data gathered, more than 66% companies are facing redundancy in supply chain, 46% are facing shipping and logistical bottlenecks, 45% are unable to meet labor costs overseas, and 43% are facing issues with raw material costs. The result is this, friendshoring supply chain have snapped, the price of oil has risen sharply, food prices are growing every day, as are the prices of commodities. The economic impact is severe in 37 out of 44 advanced economies, inflation rates have more than doubled. This list includes the UK, France, Germany, the United States.

In the month of June, inflation in the US stood at 9.1%, the highest since 1981. A new paper by the Federal Reserve says that supply chain disruptions alone are responsible for more than half of the spike in inflation. So what does the US do to combat inflation? It pushes a new strategy for global trade.

If that’s a friendshoring, how does it work? Let me give you an example. The US is heavily reliant on semiconductors, it’s an essential component of electronic devices. As of July 2020, 30% of America semiconductor imports came from China, the US wants to bring that figure down. It wants to reduce its dependence on China. How will they do it? By Friendshoring production to other countries like South Korea, it’s America’s sixth largest good’s trading partner, also a strategic ally for tech and goods. The US wants to friendshore the supply of semiconductors to South Korea.

In the month of May this year, Joe Biden visited South Korea and toured a famous chip factory to secure semiconductors supply. Atleast, 2 South Korean companies are already on board, Samsung Electronics and LG energy solution. Samsung is building a $17 billion chip plant in Texas. LG plans to invest $11 billion in the US in the next three years. And both announcements are part of America’s friendshoring shift.

US is also dependent on China for rare earth metals. That’s another key component of electric vehicles. They used to make chips and batteries. Between 2017 and 2020, China accounted for 78% of America’s rare earth imports. To bring this figure down, the US is pursuing a policy of nearshoring. Now what’s that? It is shifting it’s supply chains to neighboring countries like Canada.

In the month of June, the US partnered with the Canadian corporation to collectively mine and supply rare earth minerals. The intention is the same and America’s dependence on China and why just rare earth minerals. From biotechnology to software to food and fuel, the US is diversifying its supply chains in every sector. It is friendshoring investments and jobs to Allied countries. And all these moves are in stark contrast to what the US did in the 20th century. In the 1970s and 80s, many American conglomerates moved their manufacturing operations to any country with low cost production. Countries that had raw materials, ready to use infrastructure, a skilled talent pool, and lenient labor rules.

And this helped American businesses! It helped them save money, increase exports, and repatriate profits. According to surveys, for every dollar spent offshore, the US saved more than 58 cents back home. American brands then use these savings and invested them back into their economy. How? By opening more factories abroad and making more overseas investments. This was a story for over four decades, American brands scoured all over the world and expanded their markets to any country, which gave them the best combination of price, speed, and quality.

Back to 2022, the US changes its own rules. It no longer wants to outshore jobs. It wants to friendshore, nearshore or reassure them.

Is securing supply chains the only intention behind this? Or is there more to these decisions. To some analysts, this signals the return of the Cold War. Back in the 1960s, both the US and the USSR outsourced investments only to allied countries. They both had their respective zones of influence. They both forced countries to align with one block and stop doing business and trade with the other.

Now they seem to be repeating the same strategy with a new name. The question is isn’t going to work? Is Friendshoring supply chain what the world needs right now? You see we’re living in the golden age of globalization, the concept of friendshoring supply chain goes against the very essence of it.

We can think of three ways in which it will impact the world order;

  1. It will undermine free and fair global trade. A World Trade Organization study says if the global economy decouples into western and eastern blocks if it gets divided into friends and enemies, it will lose 5% in annual output. That’s around $4 trillion.
  2. It will hurt poor countries. Especially if they’re forced to pick a side and this will exclude them from global trade. The burden would be too heavy to deal with these countries because their economies are not equipped to deal with gaps.
  3. Friendshoring supply chain will take prices up. You see manufacturing in the developing world is cheaper. According to a recent study, an iPhone which costs $800 at the time of retail would cost nearly $2,000 If it were made entirely in the West.

If the US will friendshore production to allied countries only or automate supply chains pass through Western nations, it will only entail higher costs of labor and production. And these were just three reasons one could come up with many more, but you get the point limiting trade partners, limiting business to allies will not really fixed. If anything, it may only worsen the state of affairs. Not every country wants to take a side, not every country wants to be in blocks.