08 February 2023• 8 min read
Friendshoring, in the opinion of some analysts, might undermine the advantages of globalisation and make the world a less connected place for trade.
Friendshoring will cause price increases, and the global economy's reliance of cost arbitrage to provide inexpensive electronics, apparel, home products, and other items will end.
To minimise supply chain vulnerabilities, countries are pushing for “friendshoring” – it is also called “allysharing”. It is aimed to move away from countries that present geopolitical risk. In her visit to India recently, US secretary of treasury Janet Yellen reiterated her country's stance of pushing for "friendshoring". Companies are looking to shift their manufacturing to countries which have a stable governments or countries where transition of power happens as per the rule of law.
What is "Friendshoring"?
Friendshoring refers to a method where a nation purchases components, manufactured goods, and even raw materials from nations who share its ideals. The supply chains' reliance on the nations deemed a "threat" to their stability has been decreasing.
Nations and Their Friends
Friendshoring may give the impression that America should only develop supply chains in areas where it has solid connections, primarily with NATO allies and Pacific countries like Japan, South Korea, and Australia.
Rich democracies should lessen their reliance on China and increase trade with other regions of the world. Supply chains have faced challenges over the past two years due to politics and COVID-19. China's political actions to impose strict lockdowns caused delays in international trade and industry. Because of Russia's invasion of Ukraine, there are now wheat shortages and a sudden need for Europe to restructure its energy supply networks. To lessen their reliance on Taiwan, a geopolitically unstable island, the US and the EU are both investing in chip production facilities domestically.
It's understandable that corporate and political leaders have started to worry whether friendshoring will make supply chains more resilient given how politics puts crucial supply chains at risk. These supply networks will undoubtedly withstand political storms better than those dependent on Russia or China if Europe purchases rare earth minerals and gas from the US and then provides semiconductor chips to Australia and Canada.
Problems With Friendshoring
According to Kristalina Georgieva, the IMF's president, Friendshoring will signal a return to fragmentation, "with trade blocs and currency blocs isolating what was up to now still an integrated world economy." According to a World Trade Organization (WTO) analysis released after the Ukraine conflict started, the world economy would lose about 5% of GDP, or more than $4 trillion, if it were to become divided into "Western" and "Eastern" blocs.
Poor countries will be harmed by friendshoring. While the globalisation process has had some negative repercussions, one of its positive economic effects has been the rise in prosperity of developing nations that are active in the global economy.
According to a recent article by economist Raghuram Rajan, free trade will "exclude the impoverished countries that most need global commerce to become richer and more democratic." It will raise the danger that these nations degenerate into failed governments that serve as breeding grounds for terrorism and its export.
Friendshoring will cause price increases. IHS Technology, a research company, predicted a few years ago that the price of an iPhone 5, which retailed at the time for roughly $800, would be close to $2,000 if it were solely manufactured in the US. In a similar manner, friendshoring will raise prices because purchasing supplies from the closest Western allies of the US will result in high labour and manufacturing costs. The global economy's reliance of cost arbitrage to provide inexpensive electronics, apparel, home products, and other items will end. A dramatic increase in prices will cause a wave of social unrest because consumers are so used to these deflationary consequences.
Friendshoring, in the opinion of some analysts, might undermine the advantages of globalisation and make the world a less connected place for trade. It is a stage in the "deglobalization" process. In order to use friendshoring conservatively as opposed to aggressively, strategic items must be prioritised.