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A ‘Friend-Shoring’ Approach to Supply Chain Security – Getting It Right

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It has become increasingly clear that globalization has become a double-edged sword. On the one hand, globalization has allowed access to lower-cost resources and labor as well as new and emerging markets. But at the same time, it has created dependencies that pose risks to supply chain security and operations. The recent pandemic uncovered these vulnerabilities, and they have been further highlighted through trade wars since. As a result of this, U.S. policies labeled as “friend-shoring strategies” have been proposed. This simply refers to moving supply chain partners away from potential rivals and toward U.S. partners. But this perspective is too simplistic and fails to grasp the complexity of the situation. As China grows as an economic force, the U.S. must make sure its approach to friend-shoring is the right one.

There’s little question that the U.S. has a number of allies through which friend-shoring deals might be advanced. But relying on existing global relations to address current issues will not be adequate. Supply chain security for U.S. production and manufacturing requires a number of variables to achieve success. That means replacing valuable resources currently being acquired from China must be relocated to comparable regions. At the current time, neither domestic nor existing partnerships can answer this call. In order to realize the supply chain security the nation needs, more creative approaches are required. If the U.S. wants to get friend-shoring right, they must embrace a broader point of view in the process.

“The United States cannot make, mine, or manufacture everything ourselves. We must cooperate with our allies and partners to foster and promote collective supply chain resilience.” – Excerpt from 2022 Report “Executive Order on America’s Supply Chains: A Year of Action and Progress”

The U.S. Supply Chain Needs

The ideal situation for U.S. supply chain security naturally involves a degree of diversification. Having several options in the event disruptions occur provides assurances that American consumers’ needs are met. While the pandemic upset global supply chains affecting all nations to an extent, other factors have perpetuated them. Notable, overreliance on China and subsequent trade wars have caused ongoing issues. Unfortunately, replacing China is easier said than done. China not only offers many resources U.S. technology firms need, but they also have inexpensive, specially-skilled labor. This has made it challenging to shift gears and better ensure supply chain security moving forward.

(Manufacturing is trending toward diversity–read more in this Bold story.)

Friend-shoring is a means by which the current U.S. administration believes might help. Rather than relying on economic rivals like China, trade arrangements with allies would naturally be more reliable. But existing partners of the U.S. cannot compete with China in many situations. Even near-shoring, using allies in close proximity like Mexico, Central America and South America, have limitations. While they do offer reduced supply chain lead times and cheap labor, they cannot compete in talent. If the U.S. truly wishes to pursue supply chain security to a greater extent, this type of friend-shoring isn’t the answer.

“Favoring the friend-shoring of supply chains to trusted countries, so [the U.S.] can continue to securely extend market access, will lower the risks to our economy as well as to our trusted trade partners.” – Janet Yellen,  U.S. Treasury Secretary

Businesses Leading the Way

In the past few months, it has become evident to many corporations that greater supply chain security is needed. This is particularly true for many technology firms like Google and Apple. Despite much of the world opening up after COVID-19, China continues to impose significant restrictions. This combined with trade barriers and tariffs have notably increased the cost of doing business and delayed manufacturing. As a result, these same companies are exploring new options, particularly in other Asian nations. Apple is moving a sizable portion of its product manufacturing to countries like Vietnam and India. Google also has recently announced some of its smartphone manufacturing will occur in Vietnam.

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“Friend-shoring” means relying on our nation’s friends for manufacturing, instead of counting on our enemies.

(Apple will be making some products in Vietnam–read more in this Bold story.)

Certainly, Apple and Google could have sought domestic production opportunities. This would have perhaps been preferable to U.S. lawmakers who want to appease their base. Apple and Google might have also considered a friend-shoring strategy with other nations like Japan, Taiwan and South Korea. But in order to be competitive, these options would markedly raise their expenses and potential lower the quality of production. As a result, they sought new partners to enhance supply chain security that will maintain their competitive advantage. This is a different approach to friend-shoring, and one that U.S. policymakers should strongly consider.

“While moving supply chains away from east Asia could increase security in the long run, an ill-conceived implementation of this friend-shoring strategy could result in price hikes and a stronger China over time.” – A Report by William Reinsch, Emily Benson, and Aidan Arasasingham of the Center for Strategic & International Studies

A Smart Approach to Friend-Shoring

Current trends suggest that an ongoing fragmentation is occurring in existing globalization patterns. Increasingly, many nations are looking to boost domestic production and manufacturing to improve supply chain security. This is occurring in the U.S. with legislation recently passed aimed at boosting semiconductor and energy production. Friend-shoring represents another such strategy that doesn’t completely turn its back on globalization. But it does restrict what globalization means to those nations deemed to be allies. Many suspect this will eventually result in a bipolar economic world. On one side will be the U.S. and its economic partners, and on the other, China with theirs.

While this might be safe from a supply chain security perspective in the short term, it has long-term risks. Ignoring nations that are not currently “friendly” could hinder global business competition for U.S. firms. If such countries offer the resources at the best costs, ignoring them could set U.S. businesses up for failure. Instead, the U.S. should be aggressively seeking out new “friends” as part of its friend-shoring strategy. That means developing policies that strengthen economic and other relations with nations like Vietnam, Indonesia, India, and the Philippines. Failing to do so may not only restrict opportunities for U.S. firms. It may also give China tech titans the chance to pursue these relations for their own economic advantage. Thus, in considering friend shoring as a supply chain security measure, redefining potential U.S. friends is essential. This is the perspective U.S. policymakers and businesses alike should be considering.

 

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