The word is clumsy enough: “friendshoring,” a portmanteau buzzword for the business strategy of running supply chains only through countries that are close political partners. As a concept, though, it’s even clumsier—not to mention damaging to the world’s economy.
Politics, in addition to covid-19, have made the last two years hard on supply chains. China’s political decisions to institute hard lockdowns led to global shipping and manufacturing delays. Russia’s invasion of Ukraine has meant wheat shortages and the need for Europe to suddenly reorganize its energy supply lines. The US and the EU are both investing in semiconductor manufacturing plants at home to reduce their reliance on Taiwan, an island politically vulnerable to China.
Given how politics puts critical supply chains at risk, it’s little wonder that corporate and political leaders have begun to wonder if friendshoring will make supply chains more resilient. If Europe buys gas and rare earths from the US and in turn supplies Australia and Canada with semiconductor chips, surely these supply chains will weather political storms better than those reliant on Russia or China.
That is, at least, the theory behind friendshoring. In practice, it will be an entirely different matter.
Four ways friendshoring is bad for business
- Friendshoring is regressive. Three decades after the end of the Cold War, it is easy to forget that the world once operated on a default friendshoring mode. The US and the USSR had their spheres of influence, forcing countries to align with one bloc or another. The promise of the end of the Cold War was more openness and integration. Friendshoring will mark a retreat to fragmentation, Kristalina Georgieva, the IMF chief, said at Davos recently, “with trade blocs and currency blocs separating what was up to now still an integrated world economy.” A World Trade Organization (WTO) study (pdf) published after the Ukraine war began estimated that if the global economy decouples into “Western” and “Eastern” blocs, it will lose nearly 5% in output, the equivalent of more than $4 trillion.
- Friendshoring will harm poor countries. The process of globalization has had its drawbacks, but among its economic effects has been the growing prosperity of developing countries that participate in the world economy. Friendshoring will “exclude the poor countries that most need global trade in order to become richer and more democratic,” the economist Raghuram Rajan wrote recently. “It will increase the risks that these countries become failed states, fertile grounds to nurture and export terrorism.” In the WTO’s model of the decoupled economy, the US loses 1% in economic output, but India loses 9% and other developing countries lose 7%. The burden of friendshoring will fall disproportionately on the countries that cannot afford it.
- Friendshoring is harder than it looks. The supply chains that seemed so vulnerable over the last two years are also more robust than we give them credit for—and therefore harder to restructure than we think. When the Wall Street Journal broke down the supply chain of a hot tub, it found that the company assembling the tub in Utah was using 1,850 parts from seven different countries. Apple buys iPhone components from 43 countries on six continents. Redoing these supply chains so that they flow only through the Western world will be difficult and costly.
- Friendshoring will force prices up. A few years ago, the research firm IHS Technology estimated that an iPhone 5, which retailed at the time for about $800, would cost nearly $2,000 if it was made entirely in the US. Friendshoring will drive up prices in similar ways, because materials and components sourced from the US’s closest Western partners will entail high costs of labor and production. The arbitrage of costs that the global economy exploits to deliver cheap devices, clothing, household goods, and so much else will disappear. Consumers have become so accustomed to these deflationary effects that a sharp rise in prices will trigger surge of social discontent. In seeking to elude the effects of global political risk, friendshoring will create new kinds of political risk at home.