Friendshoring

Friendshoring or allyshoring is the act of manufacturing and sourcing from countries that are geopolitical allies, such as members of the same trade bloc or military alliance. Some companies and governments pursue friendshoring as a way to continue accessing international markets and supply chains while reducing certain geopolitical risks. Friendshoring can have downsides, including more expensive manufacturing and reduced economic output.

Origin

Bonnie Glick first used the term "allied shoring" at the start of the COVID-19 pandemic, while serving as the deputy administrator of the United States Agency for International Development. In June 2021, the term "ally-shoring" was used in an article by the Brookings Institution. In April 2022, Janet Yellen used the term "friend-shoring" in one of her speeches, and the White House spoke of “ally and friendshoring” in a June 2022 report on resilient supply chains.

Shift in U.S. trade policy

The new U.S. Trade Policy, including USMCA and IPEF, complies with the Friendshoring arrangement. One of the effects of this shift has been an increase in trade with Mexico, which in 2023 replaced China as the biggest producer of goods exported to the United States.

Advantages

Friendshoring can help mitigate supply chain risk stemming from geopolitical tensions wherein countries have full control over the flow of important materials. When appropriately balanced with reshoring, friendshoring can promote supply chain resiliency.

Friendshoring makes supply chains more reliable since it reduces dependencies on countries that are not allies. For example, companies operating in China experienced substantial interruptions due to its zero-COVID policy. Additionally, global supply chains have been thrown into disarray due to Russia's Invasion of Ukraine.

When onshoring is unfeasible or impossible, friendshoring can be a useful practice to employ to maintain offshore operations but also mitigate risk. For example, lithium, along with other raw materials, is only available in specific parts of the world. Also, if complex, mature supply chains are already developed for a particular supply or service, it is impractical to move everything onshore and friendshoring would be beneficial.

In many industries such as the automotive industry, finished goods are made through the trade of intermediate goods with other countries. In such a case, friendshoring may be more feasible than onshoring.

Objection

Friendshoring can potentially lead to more expensive products if countries depart from areas with low production costs. Economists have also suggested that friendshoring can potentially lead to supply shocks and lower growth over time.

Raghuram Rajan, former governor of the Reserve Bank of India, is critical of the "friend-shoring" development, voicing concerns about its impact on global free and fair trade. If a developing country is not considered a friend due to a perceived misalignment of values, they may be denied opportunities they could otherwise benefit from. For example, many developing countries have not adopted the U.S. sanctions on Russia after the latter's invasion of Ukraine to avoid reducing trade. If this disqualifies them from being considered a friend or ally of the U.S., they would lose economic opportunity from the U.S.

One of the difficulties of employing the friendshoring strategy is in defining a friend or an ally. In some cases, a military ally can also be a strong economic competitor. Additionally, a country's status as a friend or ally can change over time. This fluidity makes it difficult for companies or countries to make long-term decisions based on these designations.

While friendshoring can strengthen relations between two countries that are allies, it can exacerbate tension with countries that are not considered for it. This can potentially lead to political and economic instability.

Moving business out of a country due to a lack of shared values does not always reap the benefits of risk mitigation, supply chain resiliency, and reliability. If motivated for purely political reasons, the financial and supply chain impact can sometimes make friendshoring impractical.

Friendshoring is also expected to lead to reduced economic growth. The World Trade Organization estimates that global production would reduce by 5% if friendshoring results in a divide between the east and west trading blocs. The International Monetary Fund estimates that trade barriers associated with friendshoring could lead to a 2% decrease in global economic output, an impact that is spread unevenly across different countries. In an IMF simulation, friendshoring would lead to a drop of less than 1% of U.S. GDP, but as much as a 6% drop in some countries. Emerging markets in Asia outside of China are the most vulnerable to this effect of friendshoring. The IMF also found friendshoring may cause economic risks to be less diversified, potentially causing more economic downturns.

According to Hugo Dixon, friendshoring should be used as a defense mechanism, rather than an attacking one. For example, the U.S. should not use friendshoring to harm China's economy, which could escalate into a cold war and potentially a hot war. Rather, they should use friendshoring to protect against supply chain interruptions. This can be achieved by selecting strategically important products and then sourcing suppliers and increasing production in other countries, rather than severing ties completely.

See also

• Offshoring
• China Plus One