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Friendshoring: what is it and can it solve our supply problems?

Offshoring was followed by reshoring – and now US officials’ latest wheeze to deal with massive global supply chain disruption is “friendshoring”. The turbulent events of recent years – including Donald Trump’s trade wars, the Covid-19 crisis and Russia’s invasion of Ukraine – have called into question the vision of a globalised economy.

Many of the western companies that embraced offshoring – cutting costs by shifting manufacturing to countries with cheaper labour – have been encouraged by tariffs and pandemic supply chain disruption to bring production back to their home country, in a trend known as onshoring or reshoring.

However, in a report on America’s supply chains earlier this year, the Biden administration warned: “The United States cannot make, mine, or manufacture everything ourselves. We must cooperate with our allies and partners to foster and promote collective supply chain resilience.”

This is the crux of US Treasury secretary Janet Yellen’s proposal to move towards friendshoring, or allyshoring – manufacturing and sourcing components and raw materials within a group of countries with shared values. “Favouring the friendshoring of supply chains to … trusted countries, so we can continue to securely extend market access, will lower the risks to our economy as well as to our trusted trade partners,” she said in a speech at the Atlantic Council in April.

The US and its allies aim to safeguard supply chains by reducing their dependence on authoritarian regimes for materials such as rare earth and other minerals, and on Russia for commodities like gas, foodstuffs and fertiliser.

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The US relies for semiconductors on Taiwan, which is under threat from China since last week’s visit by US House speaker Nancy Pelosi, so has stepped up engagement with South Korea. On a recent trip to Seoul, Joe Biden toured a South Korean chip factory that will serve as a model for another plant in Texas. Human rights and national security concerns could see western countries move production and jobs away from China to “friendly” nations such as Indonesia, Malaysia and Vietnam.

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However, economists say there is a price to pay. Friendshoring is part of a “deglobalisation” process, which could see further supply shocks and higher prices in the short term and lower growth in the long run.

“While moving supply chains away from east Asia could increase security in the long run, an ill-conceived implementation of this friendshoring strategy could result in price hikes and a stronger China over time,” wrote William Reinsch, Emily Benson and Aidan Arasasingham of the Center for Strategic & International Studies in a report on securing semiconductor supply chains last week.

Not surprisingly, Yellen expressed a wish to “preserve the benefits of deep economic integration with China, not going to a bipolar world,” as long as China addresses western concerns over human rights and national security.