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

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Offshoring was followed by reshoring – and now the latest peep from US officials 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 the Russian invasion of Ukraine – have cast doubt on the vision of a globalized economy.

Many of the Western companies that embraced offshoring – cutting costs by moving production to countries with cheaper labor – were encouraged by tariffs and pandemic supply chain disruptions to move production back to their home countries, in a trend known as unhoring or reshoring.

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

This is at the heart of US Treasury Secretary Janet Yellen’s proposal to move to friendshoring, or allyshoring—the manufacturing and sourcing of components and raw materials within a group of countries with shared values. “Favoring supply chain advantage to…trusted countries so that we can continue to safely expand market access will reduce risks to our economy and to our trusted trading partners,” she said in a speech at the Atlantic Council in April.

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The US and its allies aim to secure supply chains by reducing their reliance on authoritarian regimes for materials such as rare earth and other minerals, and on Russia for commodities such as gas, food and fertilizer.

The US relies on Taiwan for semiconductors, which has been threatened by China since last week’s visit by US House Speaker Nancy Pelosi, and has therefore stepped up cooperation with South Korea. On a recent trip to Seoul, Joe Biden visited a South Korean chip factory that will serve as a model for another factory in Texas. Human rights and national security concerns could lead Western countries to move production and jobs from China to ‘friendly’ countries such as Indonesia, Malaysia and Vietnam.

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However, economists say there is a price to be paid. Friendshoring is part of a process of “deglobalization”, which can lead to further supply shocks and higher prices in the short term and lower growth in the long term.

“While moving supply chains out of East Asia could increase long-term security, ill-considered implementation of this friendshoring strategy could lead to price increases 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 desire to “maintain the benefits of deep economic integration with China and not move to a bipolar world” as long as China addresses Western concerns about human rights and national security.

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