US President Joe Biden has continued Donald Trump’s efforts to restructure global trade and investment in favour of the American worker and to slam the brakes on China’s relentless rise. Photo: AFP
Outside In
by David Dodwell
Outside In
by David Dodwell

Why US talk of ‘friend-shoring’ supply chains makes no economic sense

  • Companies worldwide should look to simplify and diversify their supply chains after the shocks of the pandemic and Ukraine invasion, and with a recession looming
  • However, it is not in their interests to relocate manufacturing to US friends and allies, as the Biden administration is advocating
In recent weeks, as US President Joe Biden has sought to put flesh on the bones of Build Back Better World (B3W) by developing diplomacy based on friendship, he has foisted on us two new, cryptic and probably empty acronyms – IPEF, the Indo-Pacific Economic Framework, and PGII, the Partnership for Global Infrastructure and Investment.

At the same time, he has continued Donald Trump’s dubious efforts to restructure global trade and investment in favour of the American worker, to reduce the US trade deficit, and to slam the brakes on China’s relentless rise.

Along with those acronyms, the Biden administration has developed a fascinating trade vocabulary, in particular: “on-shoring”, “near-shoring” and “friend-shoring”.

Treasury Secretary Janet Yellen tried in April to explain this new approach to trade. “Let’s build on and deepen economic integration and the efficiencies it brings – on terms that work better for American workers,” she told members of the Atlantic Council.

“And let’s do it with the countries we know we can count on. Favouring 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.”

Forgive my scepticism, but this talk of friend-based trade throws me back to 1848, when buccaneering British statesman Lord Palmerston, at the height of British colonial power, said: “We have no eternal allies, and we have no perpetual enemies. Our interests are eternal and perpetual, and those interests it is our duty to follow.”

In short, friends come and go, and they are not the stuff that long-term stable foreign policy is built on. Back in 2020, property group Savills developed a “Nearshoring Index” of countries offering the best manufacturing location if you could not reshore to the US without putting competitiveness at risk.

The top 10 were (in order) Vietnam, Ukraine, Indonesia, Serbia, the Czech Republic, Taiwan, Thailand, Sri Lanka, Russia and China. Where is the “trusted country” among them? How can the imperative to work only with friends be reconciled with the imperative to stay competitive?
Nevertheless, I see merit in companies worldwide looking afresh at their supply chains. After the profound shocks inflicted by the Covid-19 pandemic and the Russian invasion of Ukraine – and with the challenges linked to steep inflation and a looming recession – it would be an unforgivably complacent company that did not take stock.

Simplifying supply chains makes sense. So too does diversifying suppliers and locating final assembly as close as possible to consumers. But the evidence suggests that shifts are likely to be incremental and much less populated by “friends” than the US government would like.

Consultant Kearney has, since 2013, developed a Reshoring Index which measures manufacturing imports from 14 low-cost countries in Asia as a proportion of US manufacturing output.

An exodus of foreigners is under way. Does China want them any more?

From a floor of 12.08 per cent during Trump’s tariff war in 2019, the index has risen to 14.49 per cent. In sum, US companies have “deshored” rather than reshored over the past two years.

Trade and investment data also contradicts the reshoring narrative. China’s exports to the US have risen through the pandemic, to US$577 billion last year. Foreign investment in China has continued to rise steadily, to US$181 billion in 2021.

Kearney sees China’s export share falling from 24.3 per cent in 2018 to 20.1 per cent in 2021, while exports from the other Asian low-cost countries jumped from 12.6 per cent to 17.4 per cent. This suggests manufacturers have so far adopted a “China plus one” diversification strategy rather than a “near-shoring” strategy.


Delayed deliveries of Christmas gifts and trees as holiday supply chain pressure builds

Delayed deliveries of Christmas gifts and trees as holiday supply chain pressure builds

Obvious “near-shoring” candidates like Mexico and Canada so far show no clear sign of gains. In 2018, Mexico accounted for 13.8 per cent of US manufactured imports, and Canada 9.8 per cent. In 2021, Mexico remained virtually static at 13. 9 per cent, with Canada down to 9.4 per cent.

Reluctant to abandon the reshoring narrative, Kearney argues that restructuring supply chains is a complex, multi-year process and that “reshoring sentiment is on the rise”.

My own assessment on present evidence is that reshoring or “near-shoring” is much more difficult and costly than advocates suggest.

Putting on one side the reality that a large number of US investors in China are there to compete in China’s huge consumer market, note that China’s manufacturing workforce is 213.8 million strong, compared with 15.1 million in Vietnam and 14.8 million in Mexico, and its manufacturing output amounts to US$3.85 trillion – more than 12 times the combined output of Vietnam and Mexico. Their capacity to divert even a fraction of China’s output is tightly limited.

Workers assemble electronic parts at a factory in Huaibei, in central China’s Anhui province. China’s manufacturing workforce is 213.8 million strong. Photo: Chinatopix via AP

As an Unctad report noted last month, “supply-chain restructuring … is likely to become a reality only as a result of political pressure or concrete policy interventions and where incentives or subsidies change the economic equation”.

Taking all these factors into account, it seems that most multinationals are neither on-shoring nor near-shoring – and they are definitely not friend-shoring. Rather, they are “right-shoring” – taking account of all the complex economic, political, geographical and ecosystem factors that have always determined where they locate which parts of their production and supply chains.

All that has changed is that the past two years have taught painful new lessons that are now being processed. Added to the mix over the coming two years will be inflation, recession and an increasingly unpredictable and quixotic US. As Lord Palmerston might have noted 170 years ago, forget being friends; companies will focus only on their interests, and those interests it is their duty to follow.

David Dodwell researches and writes about global, regional and Hong Kong challenges from a Hong Kong point of view