International trade relations and strategies are forging new paths. The Covid-19 pandemic and the Ukraine war are forcing countries to rethink and re-evaluate the way global trade and business are carried out.
Extended lockdowns imposed by Beijing to defeat the SARS-COVID-19 virus disrupted supply chains worldwide. European Union’s reliance on Russian energy and gas stalled a swift and unified response to its invasion of Ukraine. Supply chain disruptions have pushed many countries to the brink of double-digit inflation. Further, it is feared that China’s plans to “re-unify” Taiwan may lead to a military conflict, though the timeline is unclear.
The shifting geopolitical scenario is making developed countries like the U.S., which rely heavily on imports for vital commodities and goods like semiconductor chips and rare earth minerals, take a closer look at their supply chains. The changing political landscape is forcing governments to tweak trade relations to offset potential shocks in the future.
At the start of globalization, businesses were all about “offshoring.” They outsourced jobs and set up manufacturing units in countries that offered low-cost labor, cheap raw materials, a skilled workforce, and favorable laws. Low prices and high profits made it seem a winning business strategy. And it was until employment opportunities declined, political tensions disrupted manufacturing, and dependence on foreign countries for vital goods weakened a country’s economy. The return of manufacturing stateside or “onshoring” has been taking place, though not at the pace “offshoring” had taken off three or four decades ago.
But there are limitations to “onshoring.” It is nearly impossible for any country to be self-sufficient and manufacture or produce every critical or necessary item. To ensure an adequate supply of goods to meet the nation’s demand, governments propose another strategy – friendshoring.
Recently, Treasury Secretary Janet Yellen used the term, signifying that the Biden administration is actively pursuing ways to mitigate future trade and supply chain shocks. As the word suggests, friendshoring means cultivating and improving trade relations with friendly or allied countries, especially for critical goods. Insulating and diversifying supply chains from unfriendly or politically volatile nations could largely assure businesses of uninterrupted supply and imports. While limiting economic risks, such a strategy also acts as a powerful tool to counter China and Russia.
While friendshoring does seem like the answer to ensuring a steady supply of goods, it has its downside. Some analysts caution that pursuing the strategy indiscriminately could lead to another Cold War, as countries align with one block and shun the other. According to the World Trade Organization, the resulting limitation on trade will result in a 5% loss in annual global economic output. Developing nations and their economies will suffer if forced to limit trade relations to one bloc. With friendshoring, prices are bound to go up as cheap labor, low-cost resources, and large markets become inaccessible. Further, it is widely accepted that are no permanent friends or foes in politics. Limiting trade and commerce to a small section of countries could backfire if there is a political or social upheaval in those countries.
In the current economic crisis, with China labeled a “strategic competitor” and Russia flouting the international order, a trade policy based on “friendshoring” does offer strategic political benefits. But, trade analysts warn that such an approach will come at an equal, if not greater, economic cost in the long run.
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Republished with permission from TIPP Insights
