First, there was offshoring – relocating a company’s operational processes from one country to another. Then came reshoring – returning the production and manufacturing of goods to the company’s original country. Now the buzzword is “friendshoring”– a trend US officials have introduced in their latest attempt to deal with the colossal global supply chain disruption. So what is friendshoring about, and will it solve supply chain problems?
Firstly, what is friendshoring? Also called “allyshoring,” friendshoring is where companies move their business operations – be it back-office, manufacturing, or R&D, to “friendly” countries. These are a group of nations with shared values. This concept is new to businesses and an abrupt change from the long-standing ideals of a globalized economy. So what is driving the change? Many recent turbulent events, from Trump’s trade wars to the Covid crisis, the Russian conflict with Ukraine, and more recently, tensions between China and Taiwan, a vital trade route. So, in other words, with rising geopolitical tensions, companies are moving their business operations away from China to friendly countries to play it safe.
Many western companies had welcomed offshoring to cut costs by moving manufacturing to countries with cheap labor. The People’s Republic of China became a prominent location for industrial offshoring after joining the World Trade Organization (WTO) in 2001. The growth of global information systems and software businesses has been a significant focus area. Although many regions of the world are now developing as offshore destinations, India became one of the most popular when its advancement in telecommunications improved the possibilities of trade in services. However, offshoring is now faltering.
What’s on the supply chain horizon?
Currently, US tariffs and the COVID disruptions to the supply chain have pushed businesses away from offshoring towards returning production home – onshoring or reshoring. However, the 2022 Biden-Harris Plan to “Revitalize US Manufacturing and Secure Critical Supply Chains” emphasizes that the US cannot develop, mine, or manufacture everything. Instead, it encourages continued cooperation with partners and allies to promote shared supply chain resilience and ensure the continued production of critical goods – or friendshoring. Janet Yellen, US Treasury Secretary, says that favoring trusted countries and allies will bring secure market expansion with less economic risk. Moreover, the move seeks to safeguard supply chains by lessening dependence on repressive regimes for supplies such as minerals and rare earth and Russia for commodities like gas.
And, if tensions aren’t strained enough, the threat mentioned above to Taiwan from China was spurred by US House Speaker Nancy Pelosi’s visit there. Since the US relies on Taiwan for semiconductors, Biden was quick to visit South Korea – a Samsung Electronics computer chip factory, to be precise. Continued national security and human rights concerns could see western businesses moving jobs and production from China to “friendly” countries like Vietnam, Malaysia, and Indonesia.
Is Friendshoring friendly?
An August 2022 report by CSIS researchers focuses on securing semiconductor supply chains and offers a positive agenda for global cooperation. According to the writers William Reinsch, Emily Benson, and Aidan Arasasingham, shifting supply chains from east Asia might increase security in the long term. However, the ill-conceived execution of friendshoring could lead to price hikes and a more assertive China.
Similarly, Financial Times economic writer Alan Beattie says in his recent article, “The US ‘friendshoring’ experiment risks making enemies,” favoring political partners while building supply chains is tricky, expensive, and likely self-destructive. The Guardian says economists also caution that friendshoring is a deglobalization process that could result in more short-term supply surprises, price hikes, and less long-term growth.
Taking note, Yellen says the aim is to maintain economic ties with China, rather than heading for a bipolar world if China deals with national security and human rights!