While a case can be made for shortening, simplifying and diversifying supply chains to ensure resilience, the friend-shoring strategy is driven by national security concerns. Image: Shutterstock
Inside Out
by David Dodwell
Inside Out
by David Dodwell

Why the US ‘friend-shoring’ plan to contain China will run into trouble

  • Given China’s strong and highly valued economic relations with a large part of the world, where can the US go to find a big enough group of trusted countries to friend-shore with?
  • Moreover, is it worth risking a multilateral trading system built up over 75 years?
I want to return to “friend-shoring”, preposterous and economically costly as it may be, not because the policy will lead anywhere, but because it has deep roots in US geopolitics, and is likely to sit at the heart of US diplomacy in the next year or two.

Three weeks ago, I drew on the Kearney Reshoring Index to show that US efforts to “reshore”, “near-shore” or friend-shore had over the past three years achieved nothing. Canada and Mexico, its most natural reshoring destinations, account for a smaller share of US exports than three years ago.

China’s share of US imports has indeed slipped (from 24.3 per cent in 2018 to 20.1 per cent last year), but when combined with the exports from 14 of Asia’s leading low-cost countries (up from 12.6 per cent to 17.4 per cent), the share has remained steadily close to 37 per cent.

Rather than reshoring, near-shoring or friend-shoring, exporters across Asia appear to have adopted a China+ diversification strategy. Often, Chinese companies themselves diversify into nearby economies such as Vietnam, Bangladesh and Indonesia.
While companies have responded rationally, they have done nothing to assuage the (economically non-rational) political pressure for friend-shoring, which has roots going back to 1946 and the “long telegram” by US diplomat George Kennan framing the United States’ containment strategy against Russia that underpinned decades of Cold War.
This time, it is all about the containment of China, and a rational anxiety about security, both economic and military, that has been aggravated by the glaring vulnerabilities that emerged during the Covid-19 pandemic, the net-zero targets driven by global warming, and the economic and supply chain disruption from Russia’s invasion of Ukraine.


US Senate passes Chips and Science Act to compete with China’s semiconductor industry

US Senate passes Chips and Science Act to compete with China’s semiconductor industry

The case for shortening, simplifying and diversifying supply chains to ensure resilience and prevent over-reliance on a single source market has been powerfully made over the upheavals of the past three years, and provides a strong argument for exploring onshoring or near-shoring without necessarily questioning the benefits of globalisation. Any multinational not researching such options is asleep at the wheel.

But friend-shoring is another matter. It is driven overwhelmingly by national (military) security concerns about China’s rise. It questions the value of globalisation, and takes as a given that there will be an economic price. Nato’s recent Strategic Concept report says China’s “stated ambitions and coercive policies challenge our interests, security and values”.

US Treasury Secretary Janet Yellen provided an economic rationalisation on April 13: “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.”

But she was also crystal clear about the practical challenges of the strategy: it needs to involve a large number of “friendly” countries, and they need to be trusted. That will be no small challenge.


G7, Nato rhetoric mark ‘seismic shift’ between China and the West

G7, Nato rhetoric mark ‘seismic shift’ between China and the West
Perhaps the clearest friend-shoring “haven” would be the Group of Seven – Canada, France, Germany, Italy, Japan, the United Kingdom and the United States, with the European Union as a “non-enumerated” member. The G7 historically comprises the world’s most powerful economies and clearly trusted friends. But back in Kennan’s day, Germany and Japan, as well as some countries now wedded to the EU, were neither friendly nor trusted. So America’s first friend-shoring challenge is that friends come and go.

Look beyond the G7 in search of the “large number” needed for an effective friend-shoring containment strategy, and the second challenge emerges. The largest groupings would be the United Nations, World Trade Organization, International Monetary Fund and World Bank. But after US president Donald Trump’s “America First” years, friendships have been severely tested.

For example, the UN General Assembly vote on March 2 where the United States sought condemnation of Russia for its invasion of Ukraine saw 141 endorsements, but the 35 abstentions included not just China but also India, Pakistan, South Africa and Vietnam. How friendly or trusted can India be, even as a member of the US-led Quad group that includes Japan and Australia?

As a middle ground between global organisations such as the UN or WTO and the exclusive G7, what about the G20? Including its EU member, G20 would clearly be large enough to provide the foundation for a credible friend-shoring group. But while it includes the G7, how trusted are the others?

While most members hope never to be forced to make a choice between the US or China, my quick audit of those who would sit on the fence or lean towards China include Argentina, Brazil, India, Indonesia, Saudi Arabia, South Africa and, of course, Russia.


Between two superpowers: Indonesia’s position in the US-China rivalry

Between two superpowers: Indonesia’s position in the US-China rivalry

Also, the G20 includes just one of the 10 Asean economies (Indonesia) and just one in Africa (South Africa). These regions have close interdependencies with China and would be unlikely to respond positively to friend-shoring pressure.

Facing these challenges, the US has started building the Indo-Pacific Economic Framework, but among its 14 members, at least eight have made clear that they do not want to jeopardise economic relations with China.

And here, perhaps is US’ most severe friend-shoring challenge: China’s economic relations with a large part of the world are stronger and more highly valued than relations have ever been with Russia, making a containment strategy that involves demolishing strong and beneficial economic links very unappealing.

WTO director general Ngozi Okonjo-Iweala reflected this well recently: “I’d like us to be careful. This multilateral trading system was built up over 75 years. It’s helped to lift over a billion people out of poverty. It’s delivered peace [ … ] through interdependence.”

The US perhaps needs to beware of what its more strident security hawks wish for.

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