The Biden administration has implemented a new approach called 'friend-shoring' to navigate a global economy that is more adverse to American interests. This policy involves favoring the 'friend-shoring' of supply chains to trusted countries, particularly as a strategy to reduce dependencies on China. The US government has identified countries like India and Vietnam as better locations for American companies to set up operations. As a result, Mexico and Canada have surpassed China as the main suppliers of goods to the US, with US imports from China falling by 25% in the first half of 2023. This shift in trade patterns may lead to a new wave of American protectionism.
The rise of 'friend-shoring' as a new kind of trade war has significant implications for global trade and supply chain resilience. Global trade has shrunk by 5% compared to the previous year, contracting about $2 trillion. 'Friend-shoring' refers to countries that were geopolitically aligned trading over 6% more with each other. Ukraine has become more dependent on the EU, while Russia has become more dependent on China. Taiwan has become less dependent on China and more dependent on the U.S. and Europe. The U.S. and China have both become less dependent on each other. Climate regulation has emerged as a top trade barrier, with over 2,366 climate-related non-tariff measures restricting trade, covering a quarter of global trade. Supply chain resilience will be a major concern in 2024 due to trade disruptions in the Red Sea. The trade war and the rise of 'friend-shoring' have significant implications for global trade and supply chain resilience.
Since 2018, economic protectionism utilizing international trade regulations has significantly increased. This has led to the increased emphasis on “nearshoring” or “friendshoring.” Nearshoring is the process of moving scattered global supply chains across the world to be centered in North America to avoid international uncertainties and take advantage of the US Mexico and Canada Free Trade Agreement (“USMCA”). Friendshoring expands this concept to concentrating supply chains in countries that have deep alliances with the United States. The “list” for this is primarily identified by the Committee on Foreign Investment in the United States (“CFIUS”) because, if the country is exempt from CFIUS, then it is considered to be the closest of allies that have trade controls (and policies) that mirror the United States. Currently, this is Canada, the United Kingdom, Australia, and New Zealand. The next groupings would be any country in NATO and Japan. The key, though, is an integrated supply chain that is primarily domesticated in the United States, hence the increase in incentives to build research and manufacturing facilities in the United States and only rely on friendly countries. In essence, the increase costs related to labor and parts from not having a global system is offset by the government incentives. [746072f4] [93f7c932] [78c6df37] [cf39afbb] [3acf88e8]
The term 'friend-shoring' refers to the realignment of trade networks along geopolitical lines, with trade preferences shifting towards countries with similar geopolitical stances. This has led to a concentration of global trade within major trade relationships. Political tensions, particularly between China and the US, are expected to impact global trade, causing trade costs to rise. The United Nations Conference on Trade and Development (UNCTAD) has observed a significant rise in the political proximity of trade since the second half of 2022. Trade relationships are expected to be influenced by political factors rather than commercial convenience, affecting global trade in 2024. [0dfc2712]
The US has been pushing for a friend-shoring strategy among like-minded nations, including India and Vietnam, to reduce risks to the supply chains on which they rely by not allowing China to use its dominance in key raw materials, technologies, and products to exert geopolitical advantage. However, this strategy has the unintended consequence of ensuring a continued rather than diminishing dependence on China. The friend-shoring strategy has not reduced the global supply chain's dependence on China for key raw materials like polysilicon used in solar panels. In the case of Vietnam, the friend-shoring strategy has also not run according to the script, as Vietnam remains China's largest trading partner in ASEAN and its largest foreign investor. The efficacy of the friend-shoring strategy to decouple or de-risk supply chains away from China is questionable, given China's dominance in key raw materials and its geopolitical influence. A more desirable strategy to manage US-China relations is 'competitive coexistence' as advocated by Joseph Nye. [f404ae82]
The US has transitioned from 'free-shoring' to 'friend-shoring' in its approach to economic security and supply chain resilience. Initially, the US supported China's rise through off-shoring and free-shoring, but concerns about economic dominance, supply chain disruption, and China's political system have prompted a shift in strategy. 'Friend-shoring' involves moving businesses and investments away from hostile countries to trusted ones, domestic protection through R&D aid and export restrictions, and creating a bloc of friendly trade partners. The US has launched the Indo-Pacific Economic Framework (IPEF) to regain its economic dominance, involving 14 friendly countries in the Indo-Pacific region. This shift in approach has implications for India, which can capitalize on the opportunity by facilitating assembly units and semiconductor fabrication units, leveraging the Indo-US initiative on critical and emerging technology, and adopting a more liberal approach to trade. [e39b39e0]
Chinese companies like Man Wah Furniture are relocating to Mexico to bring production closer to the US market and avoid US tariffs and sanctions. The triangular relationship between the US, China, and Mexico has led to the trend of nearshoring, with Chinese firms investing in Mexican manufacturing plants. Mexico's increased trade with the US is also due to US firms setting up Mexican facilities. However, some caution that Mexico must be wary of being caught in the middle of the US-China geopolitical struggle. Nearshoring is currently Mexico's key advantage in global trade. [977382d8]
Nearshoring, the strategy of relocating operations to nearby countries with lower costs, is gaining traction, particularly in times of political uncertainty. Changes in governments, conflicts, international disputes, and new regulations can disrupt operations. Nearshoring means moving operations to a nearby country with lower costs but minimal time zone and cultural differences compared to offshoring. It offers better control, real-time collaboration, and balanced costs. Amid political turmoil, nearshoring provides a pragmatic solution. Successful nearshoring requires careful planning, considering cultural compatibility, cost-effectiveness, intellectual property protection, and physical proximity. Challenges include differing business practices, economic fluctuations, and infrastructure quality. Nearshoring is a viable strategy for businesses dependent on global supply chains, offering cost-effectiveness, improved coordination, and reduced risk in times of political uncertainty. [244b5e15]