Considering the fluid geopolitical scenario, pandemic and disrupted supply chains, the U.S. and its allies are pursuing a new kind of global trade, one that confines commerce to a circle of trusted nations. Fans call the shift “friend-shoring.”
The new strategy is a departure from economic globalization of recent decades, when businesses bought and made products where costs were low and free-trade policies made moving goods around the world cheaper and faster.
Now, U.S. officials and their allies in Europe, Asia and the Pacific are promoting and funding new production and trading channels for essential goods that run though friendly nations. Companies including Samsung Electronics Co. and Gap Inc. are tapping into this trend. It comes after a series of disruptions, including the Covid-19 pandemic, Russia’s invasion of Ukraine, and a trade war between the U.S. and China.
Promoters of friend-shoring see it as a chance to revamp global supply chains to reduce their reliance on countries with autocratic governments and nonmarket economies, namely China and Russia. They say it is a compromise between full-fledged globalization and isolationism, and between offshoring and domestic production.
“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,” Treasury Secretary Janet Yellen said in an April speech. Such arrangements, she said, would allow the U.S. to deepen ties with a group of countries sharing “a set of norms and values about how to operate in the global economy.”
Efforts are already under way in industries including semiconductors and rare-earth metals, a crucial input for electric vehicles and missiles. Private companies are joining the fray as well, moving to increase production in countries they see as carrying relatively low political and logistical risk.
The emerging trend alarms some economists who worry it could hurt both rich and poor nations whose economies enjoyed the benefits of a more open, global trading system in recent decades. “One scenario is where we have divided blocs that are not trading much with each other, that are on different standards,” says Pierre-Olivier Gourinchas, chief economist for the International Monetary Fund. “That would be a disaster for the global economy.”
Some skeptics of free trade say “friend-shoring” is just a term to disguise more offshoring, rather than accelerating domestic production that would better secure supply chains and create American jobs. “Friend-shoring is kind of like globalization lite. If you don’t have domestic popular support for that approach, that’s not going to be successful,” says Jamieson Greer, a King & Spalding lawyer and former chief of staff for the Office of the U.S. Trade Representative during the Trump administration.
Shifting production away from China could also add to inflation, economists say.
Tensions with China in recent years have encouraged governments and companies to pursue diversification away from the country. The Covid-19 pandemic exposed the fragility of supply lines, accelerating the trend. Officials’ urgency has only increased with the war in Ukraine, which has brought export crunches of energy and food products, and waves of sanctions against Moscow disrupting global flows of money and goods.
“You may have heard people say countries that trade with each other don’t go to war with each other. In the last two months, we’ve seen that’s not necessarily true,” U.S. Trade Representative Katherine Tai said in an April speech.
She said it is essential to diversify supply sources for key goods “to make sure that the next time there is a crisis, we don’t have the panic and the sense of desperation.”
To reduce their hefty reliance on China for critical minerals needed to power items such as electric vehicles and weapons, the U.S. and Australia are working together to build rare-earth mining and processing facilities located in both countries. China currently refines 60% of the world’s lithium and 80% of cobalts, two core critical mineral inputs to high-capacity batteries, according to an April 2022 White House supply-chain report.
After meeting with Australian officials and company executives in Washington recently, Commerce Secretary Gina Raimondo said the U.S. was committed to providing necessary financing and regulatory support.
“Geostrategic circumstances have changed and that’s why we’re thinking about things that maybe a few years ago we did not contemplate,” said Arthur Sinodinos, Australian ambassador to the U.S.
In trans-Atlantic trade discussions, the U.S. and the European Union are looking at coordinating their plans to spend tens of billions of dollars to help companies such as Intel Corp. build factories for advanced semiconductors. In 2021, 92% of the world supply of advanced semiconductors came from one company, Taiwan Semiconductor Manufacturing Co., according to the White House report.
Some businesses are ahead of policy makers in their friend-shoring practices. Apparel companies in recent years had to grapple with U.S. policies clamping down on cotton products from China’s Xinjiang region linked to forced labor. Then came the pandemic-induced congestion that resulted in skyrocketing of the time and cost of shipping from Asia.
Apparel businesses’ favorite destinations are Central American countries such as Honduras, Guatemala and El Salvador. Gap is doubling the region’s share of its global production to 10% within the next year and eventually wants to raise it to 25%, according to industry executives.
While the quality of fabrics and labor availability in the region still lag behind those of China, companies benefit from the proximity to American consumers, as well as lower tariff rates under a U.S. free-trade agreement. The Biden administration is also spending billions of dollars to develop the local economy and attract private-sector investment in the region, a step officials hope will help reduce migration to the U.S.
Among the beneficiaries are companies like Intradeco Holdings, a Miami-based company that manufactures clothing in El Salvador for retailers like Walmart Inc. and Amazon.com Inc. Intradeco Chief Executive Felix Siman says that since the spring of 2021, his company has signed up four to five new customers, including PVH Corp., the parent company of Calvin Klein brands. Intradeco’s revenue this year will be 20% higher than its prepandemic level, he says. “The companies don’t want to do everything in China anymore,” Mr. Siman says. “There is tremendous interest in the region. Demand is much bigger than we can match now.”
