What is ‘friendshoring’?

It happens when a government pushes companies to restructure supply chains, shifting production from geopolitical rivals to friendly powers. The Biden administration’s ban on US investment in Chinese technology this month is an example of this. Friendshoring is similar to nearshoring, where production is moved closer to home. Both policies aim to strengthen trade security. But they come at a price: if politics, rather than profit, dictates where goods are made, production is likely to be less efficient. But proponents argue the price is worth paying to reduce countries’ dependence on hostile powers. That argument gained traction after Russia cut off its gas supplies in an attempt to force the EU to withdraw its support for Ukraine, which it invaded in 2022. It was exacerbated by rising tensions between America and China.

US Treasury Secretary Janet Yellen implicitly advocated reducing Western dependence on China in a speech last year when she called for a safer supply of critical materials, particularly those used in semiconductors and electric vehicle batteries . She recently traveled to India and Vietnam to strengthen ties with the business community there. At first glance, Friendshoring seems to be making progress. Trade relations between China and America are weakening: in 2018, two-thirds of US imports from a group of “cheap” Asian countries came from China; last year it was slightly more than half. This year, Mexico has displaced China as America’s most important trading partner.

But the reality is more complex than these numbers suggest. Although America imports less from China, its friendly suppliers continue to depend on Chinese inputs. Mexican imports of auto parts from China have doubled in the past five years. And in some strategic sectors, notably green energy, America remains dependent on China, supplying more than a third of the large-capacity batteries America imports, up five percentage points since Ms. Yellen’s speech. The EU faces a similar challenge: the bloc relies heavily on China as a supplier of 14 of the 27 raw materials it deems critical.

So far, efforts to befriend supply chains have created little more than a degree of separation in the US trade relationship with China, leaving deep economic ties largely intact. The Biden administration insists it wants to keep the divorce limited. During a trip to China from August 28 to 30, Gina Raimondo, the US Secretary of Commerce, told Li Qiang, the Chinese Prime Minister, that America does not want to break away from China. That may be because recent research has shown just how high the cost of Friendshoring can be. An IMF study in May found that Friendshoring would hurt real GDP in the Americas and Europe by 0.1% to 1%, and would do even worse damage, as much as 4.7%, to countries between the West and his opponents. Another report from the ECB shows that global gross national expenditure would fall by 5.3% in a worst-case scenario. America may be able to buy supply chain security, but that would come at a high price.

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Updated: August 31, 2023, 10:10 AM IST