Nations aim to secure supply chains by turning offshoring into ‘friend-shoring’
The new strategy is a departure from the economic globalization of past decades, when companies bought and produced products at low costs and free trade policies made it cheaper and faster to transport goods around the world.
Today, U.S. officials and their allies in Europe, Asia, and the Pacific are promoting and funding new channels of production and trade for essential goods transiting through friendly nations. Companies such as Samsung Electronics Co. and Gap Inc. are tapping into this trend. It comes after a series of disruptions including the Covid-19 pandemic, Russia’s invasion of Ukraine and a trade war between the United States and China.
Proponents of outshoring among friends see it as a chance to reorganize global supply chains to reduce their dependence on countries with autocratic governments and non-market economies, namely China and Russia. They say it is a compromise between full-fledged globalization and isolationism, and between outsourcing and domestic production.
“Fostering the ‘friend-shoring’ of supply chains in a large number of trusted countries – so that we can continue to safely expand market access – will reduce the risks to our economy, as well as to our trusted trading partners,” Treasury Secretary Janet said. Yellen said in a speech in April. Such arrangements, she said, would allow the United States to deepen its ties with a group of countries that share “a set of norms and values about how to operate. in the global economy”.
Efforts are already underway in industries such as semiconductors and rare-earth metals, a crucial input for electric vehicles and missiles. Private companies are also joining the fray, scrambling to increase production in countries they see as relatively low political and logistical risk.
The emerging trend worries some economists who fear it could hurt both rich and poor countries whose economies have reaped the benefits of a more open global trading system in recent decades. “One scenario is where we have divided blocs that don’t trade much with each other, that are on different standards,” says Pierre-Olivier Gourinchas, chief economist of the International Monetary Fund. “It would be a disaster for the global economy.”
Some free trade skeptics say friend-shoring is just a term to disguise more offshoring, rather than accelerating domestic production that would better secure supply chains and create jobs in the United States. ‘t have national popular support for this approach, it won’t succeed,” says Jamieson Greer, a King & Spalding attorney and former chief of staff in the office of the U.S. Trade Representative during the Trump administration.
Shifting production out of China could also contribute to inflation, economists say.
Tensions with China in recent years have encouraged governments and companies to continue to diversify outside the country. The Covid-19 pandemic has revealed the fragility of supply lines, accelerating the trend. The urgency of officials has only increased with the war in Ukraine, which has led to problems with energy and food exports, and waves of sanctions against Moscow disrupting global flows of money and money. merchandise.
“You may have heard people say that countries that trade with each other don’t go to war. Over the past two months, we’ve seen that’s not necessarily true,” U.S. Trade Representative Katherine Tai said in a speech in April.
She said it was essential to diversify sources of supply for key products “to ensure that the next time there is a crisis, we don’t have panic and the feeling of despair”.
To reduce their heavy reliance on China for critical minerals needed to power items such as electric vehicles and weapons, the United States and Australia are working together to build mining facilities. and processing of rare earths located in both countries. China currently refines 60% of the world’s lithium and 80% of cobalts, two mineral inputs critical to high-capacity batteries, according to an April 2022 White House supply chain report.
After recently meeting with Australian officials and business leaders in Washington, Commerce Secretary Gina Raimondo said the United States is committed to providing the necessary funding and regulatory support.
“The geostrategic circumstances have changed and that’s why we’re thinking about things that maybe we didn’t consider a few years ago,” said Arthur Sinodinos, Australia’s ambassador to the United States.
In transatlantic trade talks, the United States and the European Union are considering coordinating plans to spend tens of billions of dollars to help companies such as Intel Corp. to build advanced semiconductor factories. In 2021, 92% of the world’s supply of advanced semiconductors came from a single company, Taiwan Semiconductor Manufacturing Co., according to the White House report.
Some companies are ahead of policy makers in their friend relocation practices. In recent years, garment companies have had to contend with US policies cracking down on cotton products from China’s Xinjiang region linked to forced labor. Then came the pandemic-induced congestion that caused the time and cost of shipping from Asia to skyrocket.
The preferred destinations for garment companies are Central American countries such as Honduras, Guatemala and El Salvador. Gap is in the process of doubling the region’s share of its global production to 10% over the next year and aims to eventually increase it to 25%, according to industry executives.
While fabric quality and labor availability in the region are still lower than in China, businesses benefit from proximity to US consumers, as well as lower tariff rates in under a US free trade agreement. The Biden administration is also spending billions of dollars to grow the local economy and attract private sector investment to the region, a step officials hope will help reduce migration to the United States.
Among the recipients are companies like Intradeco Holdings, a Miami-based company that makes clothes in El Salvador for retailers like Walmart Inc. and Amazon.com Inc. Intradeco chief executive Felix Siman said that since the spring By 2021, his company had signed four to five new clients, including PVH Corp., the parent company of Calvin Klein brands. Intradeco’s revenue this year will be 20% higher than its pre-pandemic level, he says.
“Companies don’t want to do everything in China anymore,” says Siman. “There is huge interest in the area. The demand is far greater than we can currently match.”
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