Friend-shoring is a new symbolism of protectionism

It enshrouds some serious implications for globalisation and multilateral trading system

In February 2021, US President Joe Biden signed an executive order to undertake a comprehensive review of critical supply chains. The report evaluated supply chain vulnerabilities across four critical areas: semiconductor manufacturing; large-capacity batteries; critical mineral and materials; and pharmaceuticals and active pharmaceutical ingredients (APIs).

Assessment found America lacked “sufficient capacity” to produce semiconductors and relied primarily on Taiwan, South Korea and China for leading-edge logic and mature node chips. The review identified China and EU had “developed and deployed” ambitious government-led industrial policies to support their success through battery supply chain.

It noted US drug manufacturing, particularly for generic and common drugs, was “often undercut” by foreign competition from China and India. Only after realising America “cannot” manufacture all products at home or address its supply chain susceptibilities alone, the Biden Administration dropped pursuing onshoring and mooted “friend-shoring” to strengthen US resilience.

Ever since, US officials have been trying to put flesh on the concept. Once Biden made it clear to allies that he wasn’t interested in joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership; his Commerce Secretary Gina Raimondo said Washington was “very interested” to increase the domestic supply of semiconductors through the friend-shoring.

America desperately wanted to bring manufacturing at home; it couldn’t make, mine or manufacture everything over high labour prices. The domestic pitfalls led to US promotion of friend-shoring to bolster the country’s resilience. In recent months, US Treasury Secretary Janet Yellen acknowledged that America’s supply chains were “very efficient and excellent at reducing business costs” and backed friend-shoring in South Korea to develop strong supply chains for key components like electric vehicle (EV) batteries and semiconductors.

Washington also counted on New Delhi to friend-shore semiconductor production. But India is reluctant to restrict trade with Russia and has opted against signing up the trade pillar of Biden’s Indo-Pacific Economic Framework. While Indian stubborn attitude weakens the Quad position vis-à-vis Europe, her stand thins out its attractiveness as a trusted partner for friend-shoring.

Meanwhile, world leaders are taking the liberty to call out the US proposal. In May, Singaporean Prime Minister Lee Hsien Loong openly criticised friend-shoring and described it as an action to “shut off avenues for regional growth and cooperation” and drive a wedge between other states. More recently, German Chancellor Olaf Scholz said deglobalisation wasn’t an option and dubbed such efforts as protectionism.

Friend-shoring enshrouds some serious implications for globalisation and multilateral trading system. Experts warn it’s part of a deglobalisation process that will bring further supply chocks, higher prices and lower growth.

Cecilia Malmström — nonresident fellow at Peterson Institute for International Economics and former member of the European Commission and European Parliament — reckons that EU and Indo-Pacific account for 70% of global trade and 60% of direct investment flows. Emphasising further integration between the economies of the regions could strengthen stability, security, prosperity and sustainable development, she described friend-shoring as “more protectionist”.

Ngozi Okonjo-Iweala, WTO Director-General, warned against relying too heavily on friend-shoring, and hypothesised that breaking the world into two trading blocs would slash global GDP by 5%. After meeting with Scholz, she and Kristalina Georgieva, MD IMF, recalled that protectionism, decoupling and fragmentation could negatively impact global economy as well as developing and emerging markets whose economies could contract by double-digit.

In a new report, the UNCTAD warned friend-shoring could weigh on global trading system with US and EU plans potentially fragmenting the international commerce. “If you try to get away from one part of the world, you create a huge disruption to the system. Everything changes,” said Secretary General Rebeca Grynspan.

After reshoring and onshoring, friend-shoring is the latest wheeze of the Biden Administration; in practice, it’s a de facto and defunct American protectionist approach, which is launched under the veil of the new symbolism with support of the controversial legislation to steal away major allies’ high-tech production facilities and quality jobs. Cracking the tail end of the concept is as easy as winking: rip up existing global supply chains and build a whole new, US-dominated manufacturing and trading system.

Published in The Express Tribune, December 17^th, 2022.

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