Trade Partners Seek Strategy Shift

 

"WASHINGTON -- As sanctions on Russia 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. Fans call the shift "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.

Now, U.S. officials and their allies in Europe, Asia and the Pacific are promoting and funding new production and trading channels for essential goods that run though friendly nations. Companies including Samsung Electronics Co. and Gap Inc. are tapping into this trend. It comes after a series of disruptions, including the pandemic, sanctions on Russia, 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 with autocratic governments and nonmarket economies, namely China and Russia. They say it is a compromise between full-fledged globalization and isolationism, and between offshoring and domestic production.

"Favoring the 'friend-shoring' of supply chains to a large number of trusted countries -- so we can continue to securely extend market access -- will lower the risks to our economy, as well as to our trusted trade partners," Treasury Secretary Janet Yellen said in an April speech. Such arrangements, she said, 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 under way in industries including semiconductors and rare-earth metals, a crucial input for electric vehicles 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.

The emerging trend alarms some economists who worry it could hurt both rich and poor nations whose economies enjoyed the benefits of a more open, global trading system in recent decades. "One scenario is where we have divided blocs that are not trading much with each other, that are on different standards," says Pierre-Olivier Gourinchas, chief economist for the International Monetary Fund. "That would be a disaster for the global economy."

Some skeptics of free trade say "friend-shoring" is just a term to disguise more offshoring, rather than accelerating domestic production that would better secure supply chains and create American jobs. "Friend-shoring is kind of like globalization lite. If you don't have domestic popular support for that approach, that's not going to be successful," says Jamieson Greer, a King & Spalding lawyer and former chief of staff for the Office of the U.S. Trade Representative during the Trump administration.

Shifting production away from China could also add to inflation, economists say.

Tensions with China have encouraged governments and companies to pursue diversification away from the country. The Covid-19 pandemic exposed the fragility of supply lines, accelerating the trend. Officials' urgency has only increased with the sanctions on Russia, which has brought export crunches of energy and food products, and waves of these sanctions against Moscow disrupted global flows of money and goods.

"You may have heard people say countries that trade with each other don't go to war with each other. In the last two months, we've seen that's not necessarily true," U.S. Trade Representative Katherine Tai said in April.

To reduce their hefty reliance on China for critical minerals needed to power items such as electric vehicles and weapons, the U.S. and Australia are working together to build rare-earth mining and processing facilities in both countries. China currently refines 60% of the world's lithium and 80% of cobalts, two core critical mineral inputs to high-capacity batteries, according to a White House supply-chain report.

In trans-Atlantic trade discussions, the U.S. and the European Union are looking at coordinating their plans to spend tens of billions of dollars to help companies such as Intel Corp. build factories for advanced semiconductors. In 2021, 92% of the world supply of advanced semiconductors came from one company, Taiwan Semiconductor Manufacturing Co." [1]

1. U.S. News: Trade Partners Seek Strategy Shift
Hayashi, Yuka. 
Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 16 May 2022: A.3.