‘FRIEND-SHORING’ APPROACH

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Context

US treasury secretary Janet Yellen, who was in New Delhi, said that US will pursue the ‘friend-shoring’ approach with trusted allies like India.

What is Friendshoring?

It is the practice of relocating supply chains to countries where the risk of disruption from political chaos is low.
It is when companies move their business operations – be it back-office, manufacturing, or R&D, to “friendly” countries.
These are a group of nations with shared values. This concept is new to businesses and an abrupt change from the long-standing ideals of a globalized economy.

What is driving the change?

Many recent turbulent events - from Trump’s trade wars to the Covid crisis, the Russian conflict with Ukraine, and more recently, tensions between China and Taiwan, a vital trade route is driving the change.
So, in other words, with rising geopolitical tensions, companies are moving their business operations away from China to friendly countries to play it safe.

Stance of US Government

US companies should focus on making products at home (“reshoring” or “onshoring”), closer to home (“nearshoring”) or in countries aligned with US interests — a concept that lacked an established term but the US is calling it “allied shoring.”

Implications

Not everyone is convinced that friendshoring would be good for the economy. In a report on the trade implications of the war in Ukraine, the World Trade Organization predicted that if the world split into Eastern and Western trading blocs, global GDP would drop by 5%, with emerging economies bearing most of the cost.
The US ‘friendshoring’ experiment risks making enemies and building supply chains is tricky, expensive, and likely self-destructive.
Friendshoring is a deglobalization process that could result in more short-term supply surprises, price hikes, and less long-term growth.

Closing Thought

Friendshoring is an understandable policy if it is strictly limited to specific items directly affecting national security.