Tag: friend-shoring

OM in the News: Is “Friend-Shoring” a Solution to Global Supply Chain Challenges?

The onset of the COVID-19 pandemic and Russia’s invasion of Ukraine had profound consequences for the global economy, not least by exposing the fragility of global supply chains, which had to contend with restrictions that prevented goods and raw materials from reaching their end destinations. And while a host of stop-gap solutions have been proposed to counter these issues, the flare-up of geopolitical tensions over the last year has prompted key trading players to look to “friend-shoring”—the manufacturing and sourcing of components from countries with shared political values—to resolve this persistent supply-chain turbulence. This also means countries perceived as economically safe or low-risk, to avoid disruption to the flow of business.

But this potential solution is not without drawbacks, writes International Banker (March 30, 2023). The practice has stoked concern within the international community about the possibility of further geo-political fragmentation and deglobalization of the world’s economy – the decline of interdependence between nations, global institutions and enterprises.

The US government, as an example, has stressed its intention to obtain components and raw materials from ‘friendly’ countries with shared values to increase security of domestic production. US Treasury Secretary Yellen set out the new approach to trade last year, saying: “Rather than being highly reliant on countries where we have geopolitical tensions and can’t count on ongoing, reliable supplies, we need to really diversify our group of suppliers. And we need to deepen our ties with those partners and to work together to make sure that we can supply our needs of critical materials.”

Yellen added that the US is providing $500 million in debt financing to its biggest solar-manufacturing company to build a plant in India to help diversify supply chains away from China. Other American multinationals are also opting for greater exposure to India—an ostensibly friendlier option than China. Tech giant Apple recently made friend-shoring moves, relocating some of its iPhone production to India from China. Currently, only 5% of Apple products are made outside of China, but this could rise to 24% by 2025.

The United Kingdom, meanwhile, proposed the creation of a network of liberty. “The more freedom-loving countries trade with each other, build security links, invest in our partners and pull more countries into the orbit of freedom, the safer and freer we all are,” said the Foreign Secretary.
Classroom discussion questions:
1. Explain the difference between friend-shoring, nearshoring, and reshoring? Where does Mexico fall?
2. What are the advantages and disadvantages of friend-shoring?

 

OM in the News: Turning Offshoring into “Friend-Shoring”

As war and the pandemic expose the fragility of 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. The shift, writes The Wall Street Journal (May 16, 2022), is called “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.

“Friend-shoring” is a chance to revamp supply chains to reduce reliance on autocratic nations  and nonmarket economies

Now, the U.S. and allies in Europe, Asia and the Pacific are promoting and funding new production and trading channels for essential goods that run though friendly nations. This trend comes after a series of disruptions, including the 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 such as China and Russia. They say it is a compromise between full-fledged globalization and isolationism, and between offshoring and domestic production. Such arrangements, says U.S. Treasury Secretary Janet Yellen, “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 EVs 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. U.S. Trade Representative Katherine Tai 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.”

Some businesses have already moved ahead in their friend-shoring practices. Apparel companies 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%.

Classroom discussion questions:

  1. What are the disadvantages of “friend-shoring”?
  2. The advantages?