In January 2019, the World Economic Forum (WEF) published an article entitled “A Brief History of Globalization.” Although penned prior to the COVID-19 pandemic that nearly crippled the world economy and an unprovoked war on European soil that’s adding to global woes, several lines in the article strike a prescient note, including this one: “As a political ideology, ‘globalism’, or the idea that one should take a global perspective, is on the wane.”
In closing, author Peter Vanham, WEF’s Deputy Head of Media, underscored globalization’s uncertain future: “Technological progress, like globalization, is something you can’t run away from, it seems. But it is ever changing. So how will Globalization 4.0 evolve? We will have to answer that question in the coming years.”
Fast forward to the present day, in which the vulnerabilities of a globalized, fragmented, and therefore-fragile supply chain have been demonstrated time and time again.
Although describing it through the positive lens of what the internet has enabled, Vanham’s description captures a major dynamic underlying the supply chain disruptions that have become the new norm: “…the internet also allowed for a further global integration of value chains. You could do R&D in one country, sourcing in others, production in yet another, and distribution all over the world.”
For decades, it was a hugely successful scenario on multiple fronts—until a global pandemic shut down critical sections of the supply chain. And subsequently, a rogue nation decided to start a new war, dividing the world into those willing to stand together against it—and those either remaining neutral or offering outright support.
Into such dynamics enters a fairly new, yet increasingly-common term: “friend-shoring.”
Nations Aim to Secure Supply Chains by Turning Offshoring Into ‘Friend-Shoring’ - WSJ https://t.co/Fxy4pw8vEj
— Nell Henderson (@NHendersonWSJ) May 16, 2022
What is “Friend-Shoring”?
After U.S. Treasury Secretary Janet Yellen used the phrase in an April 13th Atlantic Council speech, news stories and opinion articles discussing the concept started popping up from various outlets. The following excerpts from Yellen’s speech provide a bit of context for the concept:
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“The course of the global economy over the past two years has been shaped by COVID-19 and our efforts to fight the pandemic. It’s now evident though that the war between Russia and Ukraine has redrawn the contours of the world economic outlook.”
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“Russia’s horrific conduct has violated international law, including core tenets of the UN Charter—challenging countries to demonstrate where they stand with respect to the international order that has been built since World War II. Therefore, when I speak about a changed global outlook, I’m not just talking about growth forecasts. I’m also referring to our conception of international cooperation going forward.”
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“I will focus my remarks today on the significance of international cooperation in this current environment and for our future. The power of working together with our partners has been essential in confronting Russia; we need to take that lesson on board as we tackle the most pressing global issues we face today.”
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“We have seen that swift and sweeping sanctions can have enormous force. The United States, along with over 30 countries, representing well over half the world’s economy, has imposed an unprecedented suite of financial sanctions and export controls on Russia.”
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“By joining together, we demonstrate that these sanctions are not motivated by any one country’s foreign policy objectives. Rather, we are acting in support of our principles—our opposition to aggression, to widespread violence against civilians, and in alignment with our commitment to a rules-based global order that protects peace and prosperity.”
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“While many countries have taken a unified stand against Russia’s actions and many companies have quickly and voluntarily severed business relationships with Russia, some countries and companies have not. Let me now say a few words to those countries who are currently sitting on the fence, perhaps seeing an opportunity to gain by preserving their relationship with Russia and backfilling the void left by others. Such motivations are short-sighted. The future of our international order, both for peaceful security and economic prosperity, is at stake. This is an order that benefits us all. And let’s be clear, the unified coalition of sanctioning countries will not be indifferent to actions that undermine the sanctions we’ve put in place.”
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“The Russian invasion of Ukraine has dramatically demonstrated the need for us to stand together to defend our international order and protect the peace and prosperity that it has conferred on advanced and developing countries alike. As we do so, it is worth considering the breadth of unmet global challenges that would benefit from greater cooperation of the kind we have mustered in confronting Russia.”
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“On some issues, like trade and competitiveness, this will involve bringing together partners that are committed to a set of core values and principles. …”
Yellen then presented “a set of propositions on how to turn some of our problems into opportunities to move forward,” starting with a “friend-shoring” framework, which included the following points:
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“First, we need to modernize the multilateral approach we have used to build trade integration. Our objective should be to achieve free but secure trade.”
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“We cannot allow countries to use their market position in key raw materials, technologies, or products to have the power to disrupt our economy or exercise unwanted geopolitical leverage.”
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“Let’s build on and deepen economic integration and the efficiencies it brings—on terms that work better for American workers. And let’s do it with the countries we know we can count on.”
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“Favoring the ‘friend-shoring’ of supply chains to a large number of 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.”
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“We should also consider building a network of plurilateral trade arrangements to incorporate elements of the modern economy that are growing in economic importance, especially digital services.”
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“We should harmonize our approaches to protecting the privacy of data. And a modernized trade system will also require the ability to effectively enforce trade policies and practices, both multilateral and bilateral.”
AKA “Allied-Shoring” or “Ally-Shoring”
Although fairly new, “friend-shoring” is an iteration of a related concept by a slightly different name, as Bloomberg writer Peter Coy pointed out in his June 2021 article, “‘Onshoring’ Is So Last Year. The New Lingo Is ‘Friend-Shoring’.”
In the article, he described the shifting language landscape of global manufacturing and trade: “First there was ‘offshoring’—transferring production abroad to save money. Then there was ‘onshoring’ or ‘reshoring’—bringing production back home to reduce the potential for disruption of supply chains. The latest lingo is ‘friend-shoring’ or ‘ally-shoring,’ which is similar to reshoring except that it’s not restricted to domestic production. Reliable friends and allies are also deemed OK as sources.”
Coy noted that the “new, more inclusive terminology” was previously cited in a July 2020 Newsweek article by Elaine Dezenski and John Austin that “credited Bonnie Glick, who served in 2019-20 as deputy administrator of the U.S. Agency for International Development, with privately using the term ‘allied-shoring.’”
As Coy said, the article’s authors gave the term a slightly different twist.
“We’d like to call it ‘ally-shoring,’” they wrote. “Ally-shoring means leaning into economic partnerships with those who share our values and strategic interests. It means rebuilding our economy with nearby friends with whom we already have tightly wound production and business service networks, such as Canada, Mexico, Costa Rica and American territories like Puerto Rico and Guam. It means invigorating relationships and re-forging economic and social linkages between the U.S. and long-standing allies in Western Europe, the Middle East and Asia (including India, Thailand, Vietnam, Japan and Korea).”
Referencing the dynamics of the pandemic, they also described the potential benefits involved: “Ally-shoring can deliver new economic opportunity for our own people, and this is where we need to start. Building on this work with our democratically minded friends around the world will generate real prosperity for allies who embrace our historically open and democratic norms, reanimating a rules-based coalition that is more than the West, but truly global.”
Coy said “The Biden administration adopted ‘ally-shoring’ and spun it into ‘friend-shoring’ in a 250-page report” released June 2021 entitled, “Building Resilient Supply Chains, Revitalizing American Manufacturing, and Fostering Broad-Based Growth.”
The Potential Impact of “Friend-Shoring”
While some tout the benefits of this new approach to global cooperation, others are more wary about the negative impacts that may occur. According to the headline of a recent WSJ article, “‘Friend-Shoring’ Might Be Bad for Global Growth, Inflation.” The article’s description notes that “Some economists worry that picking trade partners for geopolitical reasons could create a world of antagonistic blocs.”
An analysis by Bloomberg’s Bryce Baschuk published June 23rd by the Washington Post outlines what he perceives as the potential winners and losers of a “friend-shoring” framework, as well as the potential impact:
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Potential winners: In addition to listing a number of Indo-Pacific countries “deemed to be ‘trustworthy’ by the US and its allies,” Baschuk says that geographic diversification of the global supply chain “will also help businesses become more resilient to external shocks like wars, famine, political changes or the next pandemic.”
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Potential losers: Noting that the “US-led effort” primarily targets “non-market economy regimes like China that the US sees as unfairly supporting their domestic industries and at nations that violate international norms, like Russia,” Baschuk adds that “there would be repercussions for the countries within a friend-shoring alliance.”
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Potential impact: Writing that some refer to this process as “de-globalization” or “decoupling,” Baschuk says the dynamics involved “would likely lead to short-term supply shocks and higher prices — developments not unlike those produced by the turmoil of recent years.” Additionally, “In the long run, the outcome is likely to be lower economic growth due to lost efficiencies, higher costs and supply bottlenecks. …”
In its article entitled, “Nations Aim to Secure Supply Chains by Turning Offshoring Into ‘Friend-Shoring’,” the Wall Street Journal (WSJ) includes the following March 23rd video, “Why Global Supply Chains May Never Be the Same—A WSJ Documentary.”
Here’s the description: “Every day, millions of sailors, truck drivers, longshoremen, warehouse workers and delivery drivers keep mountains of goods moving into stores and homes to meet consumers’ increasing expectations of convenience. But this complex movement of goods underpinning the global economy is far more vulnerable than many imagined.”
