by Migena Satyal
In today’s society, economies and businesses have become highly globalized, integrated, and interdependent on each other leading to a contraction of trade and investment barriers. Multinational Enterprises(MNEs) have taken advantage of this phenomenon to create opportunities for themselves by exploiting globalization of production, allowing them to diversify and expand their source of revenue by offshoring components of their supply and value chains into low-cost areas.
In recent years, ideological and geopolitical tenstions between the United States and China has caused American policymakers and MNE managers to rethink their decision on where to offshore to avoid being caught amid a conflict.
The United States is working on strengthening relations with its allies amid competition with China through the concept of friend-shoring. World Economic Forum refers to Friendshoring as a “growing trade practice where supply chain networks are focused on countries regarded as political and economic allies.” This process includes a combination of nearshoring and reshoring. Nearhosring brings production close to the consumer marker while reshoring transfers production back to the home country. This idea was first mentioned by Janet Yellen, Secretary of Treasury, during her announcement of Biden Administration’s approach to navigate the global economy at the Atlantic Council where she stressed the importance of deepening economic integration with reliable countries to eliminate “unwanted geopolitical leverage.” It aims to strategically place components of the supply chain in countries and jurisdictions that are closely tied to the United States.
The main objective of friendshoring is to decouple from China and reduce American economy’s reliance on it. Currently China has embraced its dual circulation strategy which aims to reduce China’s reliance on other countries but increase other states’ reliance on China. To combat this strategy, the U.S government and businesses have already started to affirm the practice of friendshoring. The U.S government has invested in “rare earth mining” along with “processing facilities” in Australia to decrease reliance in China and have been able to refuge China’s global market share by 20 percent. America is also reliant on Taiwan for semiconductors however, China’s continued threat to the island has forced the Biden Administration to engage with South Korea. Additionally, American tech giants like Apple have started friendshoring by relocating Iphone production from China to India as suggested by JP Morgan analysis: “Currently, only 5% of Apple products are made outside of China, but recent JP Morgan analysis suggests this could “rise to a quarter by 2025.”
Friendshoring has also been described as ‘deglobalization’ effort as the government and companies aim to reduce the globalization of their supply chains which poses threat to independent businesses but also the global economy. Reconfiguring supply chains can be extremely expensive for businesses due to relocation costs. A report regarding semiconductor supply chains from the Center of Strategic and International Studies argues that “while moving supply chains away from east Asia could increase security in the long-run, an ill-concieved implementation could result in price hikes and a stronger China over time.” Additionally, the split between eastern and western trading blocks would decrease global GDP by 5 percent, as reported by the World Trade Organization.
Going forward, the United States needs to properly reassess the impact of ‘friendshoring; and the measures it will to take to ensure that businesses and consumers do not have to suffer economically.