Friend-shoring has fans in government, but may prove trickier to implement
Repositioning supply chains to friendlier countries is high on Western government agendas, but the reality of making these moves attractive to consumers and companies could stymy plans
Friend-shoring, a term coined by US Treasury Secretary Janet Yellen, could be the new way forward for global trade according to Canadian Finance Minister Chrystia Freeland. Instead of relying on market economics for the sourcing of materials, Western governments are looking at ways of using incentives to encourage key industries to source from political allies.
However, critics of the system say this is nothing more than trade protectionism, strongly based on American procurement rules and focusing on efforts to boost domestic manufacturing.
Walid Hejazi, professor of economic analysis and policy, University of Toronto’s Roman School of Management, does not think the concept of friend-shoring is particularly viable because consumers are unlikely to want to pay the price premium if manufacturing is moved on a large scale from economies with low labour costs.
Different governments, however, are thinking in terms of incentives to encourage companies to move supply networks to friendlier jurisdictions. The US is already changing its trade tariffs to benefit Japan, as opposed to China, in the manufacturing of commodities like steel.
Canada, for its part, is busy promoting new foreign policy frameworks like the Indo-Pacific Strategy, calling for greater investment in domestic transportation infrastructure and aiming to make Canada a reliable supplier of clean energy, hydrogen and critical minerals for its allies (Japan, Australia, India and Taiwan). A particular focus has been on battery and electric vehicle minerals like copper, cobalt and lithium.
Both countries are looking at establishing free-trade zones to lure companies away from hostile rivals.
Whatever the incentives, global supply chains cannot be moved overnight and it looks like the reliance on China and Southeast Asia for manufacturing isn’t going to stop anytime soon.
Reuters Events, Supply Chain research backs up this view, with many companies looking closer to home, but the most attractive countries for those looking to shift sourcing globally were India and Vietnam – low labour cost countries that are non-aligned globally, rather than sitting in the western sphere of influence.
Nonetheless, companies and countries are aware of the risks from factors like geopolitics, climate change and possible future pandemics and do wish to have systems in place to deal with them by adding in redundancy and reducing the distances involved in supply chains.
Furthermore, investors increasingly place more weight on ESG (environmental, social and governance) standards, which are often easier to monitor and implement in shorter supply chains in more developed countries.
Candice Chow of McMaster’s DeGroote School of Business says it is important countries don’t just pull up the proverbial drawbridge. Countries have always traded with their enemies. She urges politicians to decide exactly what long-term outcomes they want to derive from friend-shoring.