There have been few times in history such as the years 2020-2021 where the world witnessed the outbreak of the COVID-19 pandemic – and the proliferation thereof – fundamentally altering the course of doing business in the coming years. 2020 was marked by some of the largest reductions in trade and output volumes since World War II, with declines in both world industrial production and goods trade in the first half of 2020 like the 2008 financial crisis. The implications of such cataclysmic event are that the fundamentals of conducting international businesses and the terms of trade between nations saw massive shifts and changes. The geopolitical implications of these changes included the rise in prominence of nations like China and India in the global trade.
The concept of ‘friendshoring’, though present earlier, began to make rounds in trade talks around this time. Friendshoring is essentially nations procuring their raw goods, manufacturing components and even finished goods from their selected allies that share their objectives and values. Friendshoring is done in a direct attempt to reduce the dependence on enemy or hostile nations for key natural resources and trade. In the background of Russia’s invasion of Ukraine, friendshoring is seen as a viable trade strategy, given the way that Russia weaponized and exploited its dominance over natural resources in Europe and managed to continue trade with several nations who helplessly relied on Russian natural gas and oil exports.
While the concept of friendshoring is relatively new, the idea existed well before the Industrial revolution. Globalization essentially connected countries and intricately linked their domestic economies, thus, even if China were to be hostile to American policies and/or trade – directly or indirectly – trade would still continue regularly.
Friendshoring policies could be formulated in ‘attacking’ and ‘defensive’ modes; the attacking strategy would be to actively restrict and prohibit trade with hostile nations whereas defensive strategies include expanding and diversifying trade and manufacturing in other nations.
The primary issue with friendshoring is the deterioration of critical economic links and trade relations. A report by Allianz Group stated that USA remains dependent on China for 276 critical goods which include electronics, chemicals, metals, and textiles. Friendshoring is shown to have a negative impact on the nations’ economies, as seen with the controversy over Russian oil exports. World economy faced stagnation as a result of the ongoing war and Europe faced a serious energy crisis that saw its resources being severely depleted.
Secondly, friendshoring essentially means that global trade disintegrates into independent blocs and trade groups. It is already obvious that fault lines have been created in world trade with preferential trade agreements and excessive customs and restrictions over the goods of certain countries like Taiwan. Friendshoring speeds up the process of deglobalization, which is characterized by the diminishing integration of global trade, which also corresponds with decreasing foreign investment.
Several sectors within manufacturing like pharmaceuticals and chemicals are usually heavily dependent on foreign investments. In addition to that, key services sectors like IT services, and telecommunications sector, which play a huge role in employment and GDP of developing nations like India, will disintegrate without adequate Foreign Direct Investment (FDI). This deglobalization eventually diminishes international trade in the long-term and even gives rise to international conflict.
Friendshoring will also give rise to domestic economic issues such as hyperinflation, severe public debt, and increased interest rates. This is due to the integrated nature of modern economies. To successfully transition out of dependence on other nations takes decades of concerted efforts, and even then, nations will not be able to make it out without serious consequences to their economic conditions.
Friendshoring will work against the development of smaller and poorer nations as new trade barriers and hostilities in international business occur. Globalization has succeeded in boosting the growth of several underdeveloped and developing countries and friendshoring will reverse its boons and gains.
Despite the serious disadvantages that friendshoring poses, most European countries and USA seem to agree that this strategy is a viable option. Recently, noted economist Janet Yellen, United States Secretary of the Treasury, supported policies that advocated for friendshoring in principle.
Developed countries like the USA and the Europe unfortunately do not concern themselves with the serious ramifications of deglobalization policies on poorer nations, who will inevitably suffer more due to price inflation and trade restrictions. However, even such nations are cautious in their approach, in fears of a possibility of starting a ‘trade war’ with ‘unfriendly’ nations like China, which the global economy is heavily dependent on. Therefore, while friendshoring would grow in prominence over the coming years, it remains practically unviable for most countries.
Written by Alan Joseph Benny
Edited by Akanksha Choudhary
