In the wake of cumulative global crises, including the COVID-19 pandemic, the Russian invasion of Ukraine, and China’s geopolitical unpredictability, noticeable supply chain insecurity has sparked deliberation in Western governments about the viability of reformulating global production networks. Some policymakers have proposed friend-shoring and near-shoring as solutions, as they apparently hold out hope of modulating globalization to fit new geopolitical realities. However, while both friend-shoring and near-shoring show tremendous promise in mitigating the risk of supply chain disruptions, it remains to be seen if they will enhance or harm the rules-based-international-order (RBIO), as they are exclusionary in nature.
The concept of friend-shoring involves relocating supply chain nodes from countries with adversarial political systems to allied economies that share democratic political philosophies and common adherence to the principles of the RBIO. The Biden Administration has repeatedly raised friend-shoring as a potential solution for critical supply chains, first in a 2021 report addressing the need for more control over semiconductors, large-capacity batteries, pharmaceuticals and critical minerals, and then through Secretary of the Treasury Janet Yellen’s 2022 speech to the Atlantic Council, in which she called for allies to be favoured in economic relationships. The Canadian government has also promoted friend-shoring as a policy preference, with Deputy PM Chrystia Freeland voicing support for the idea.
Proposals for friend-shoring are inherently aimed at risk-aversion, as they aim to bolster supply chain confidence by relocating manufacturing to politically safe countries that are distant from the international politics of geopolitical competition. Considering China’s Zero-Covid policy, as an example, friend-shoring may obviate supply chain bottlenecks and inflation by placing critical manufacturing nodes in countries with governments unable to enact such draconian policies. The core G7 countries and other NATO members are destinations for such supply chain coordination. Additionally, these countries traditionally value the art of diplomacy in addressing international trade disputes through institutions like the former GATT and current WTO rather than employing corporate sabotage and retaliatory measures. Friend-shoring’s most significant obstacle is in maintaining comparative advantages. While some of NATO’s closest partners, namely Canada, the United Kingdom, and the United States, have virtual universal agreement on big-picture foreign policy issues, they also have similar labour market conditions that make manufacturing inputs significantly more expensive. With these considerations, friend-shoring can tread a path toward geopolitical partner countries that do not exactly share philosophical principles. These periphery countries are a third category of states that are not as democratic and free as Western countries would like, but they are not adversarial either. Trade with such countries is rational and should not be abandoned.
Friend-shoring stimulates the ethos of the North Atlantic Treaty’s Article 2, which, in part, encourages NATO members to both eliminate policies that could cause economic conflict and ensure collaboration between any or all members. Nevertheless, it is conceivable that the pursuit of bolstering democratic alliances within NATO member states inadvertently imposes constraints on the global reach of the RBIO solely to nations that already embrace its underlying principles.
Of course, there is also the concept of near-shoring, a more ambiguous practice that involves moving critical supply chain nodes to host economies in close proximity to a firm’s domestic market. For example, near-shoring would describe the process of relocating the manufacturing of an American firm to Mexico or Central America. Near-shoring offers several attractive advantages, including preserving cost-saving measures commonly associated with off-shoring by focusing on economies with low-cost manufacturing and saving transportation costs due to reduced distances between production and domestic markets. While near-shoring may strike a balance between geopolitical and financial interests, increased use can separate the global economy into regional economies.
In World Order, Henry Kissinger hypothesized the prospect of the world retreating to regional blocs that would perform the role of states in the Westphalian system. This scenario is markedly different from the goals of the RBIO because it retreats to a historical precedent where states maneuvered for maximum advantage based on national interest. Additionally, a world of blocs formed by friend-shoring and near-shoring would freeze geopolitical rivals like Russia and China but also unaligned periphery states seeking to trade with any and all willing parties. Abandoning the enforcement of the RBIO could push unaligned states into the arms of geopolitical rivals, thereby undermining the RBIO’s efficacy. If only friends and regional partners trade, unaligned states will move towards geopolitical rivals who have little intention of promoting the values of the RBIO.
When assessing the geopolitical stance of actors like China and Russia, corporate and government policymakers should absolutely limit exposure to prevent conflicts over trade and the safe supply of resources. However, the balance between risk mitigation and global retrenchment is not yet clear. All things considered, economy-wide friend-shoring is unrealistic because of both the tremendous costs of relocating and rebuilding supply chains in expensive labour markets as well as the idea that supply chains with incredible complexity could be recreated inorganically. The existence of near-shoring as the cheaper alternative to friend-shoring in supply chain management discourse is an implicit understanding that friend-shoring is a very limited solution. Nevertheless, multinational corporations should re-commit to RBIO principles by leaning on relationships with trusted allies in areas of utmost importance, such as the industries listed in the Biden Administration report. A commitment to long-standing partners can enhance the RBIO if done effectively. Regardless, the greatest obstacle to friend-shoring and near-shoring is maintaining economic cooperation among allies and regional partners, a value that has deteriorated in recent years.
Photo: “Birds-eye View Photo of Freight Containers” (2019) by Tom Fisk via Pexels. Public Domain.
Disclaimer: Any views or opinions expressed in articles are solely those of the authors and do not necessarily represent the views of the NATO Association of Canada.