Friendshoring: Logic, Focused Sectors and Skepticism

By Rahul Guhathakurta

Cover Image Attribute: The Port of Mundra in the State of Gujarat, India

In July 2022, U.S. Treasury Secretary Janet Yellen rallied support from allies of the United States during a speech she gave at the L.G.'s Science Park in Seoul. In her speech, she encouraged allies to work together to carve out more resilient supply chains among trusted partners through a practice known as "Friendshoring." 

The Logic

The word "Friendshoring" is derived from the ideas of "onshoring" and "nearshoring," which describe the process of moving supply chains back to the US or to a location closer to the US as an alternative to having them in other nations. Friendshoring goes beyond that but limits supply chain networks to allies and friendly countries, i.e., manufacturing and sourcing components and raw materials within a group of countries with shared values. The desire for greater independence from suppliers whose authoritarian temperament generates risks of political blackmail and economic coercion is a primary driver of friendshoring. 

In a discussion that has, until now, focused mainly on the operational dependability of supply chains, Yellen's suggestion brings the geopolitical dimension of "trusted trading partners" into the conversation. To put it another way, "political convergence" now needs to be derived from the preexisting criteria of efficacy, sustainability, and resilience. 

Since the beginning of COVID-19, the U.S. has been actively advocating for increased safety throughout its supply chains. At the beginning of 2021, the President of the United States, Joe Biden, signed an order to review American supply chains to decrease dependency on foreign suppliers. And earlier this year, the Biden administration issued a study on the United States' supply chains, which issued the following caution: "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."

The Focused Sectors

In June 2021, A report by the White House identified four "Critical Supply Chains"; considered an inherent part of national security risk. And those are as follows; 

• Semiconductor manufacturing and advanced packaging; Reviving the industrial clout of the US are one of the goals of several initiatives now underway. The most recent illustration of this is the CHIPS and Science Act, which the US Congress recently approved to encourage more research, development, and manufacturing of semiconductors within the country.  Significant emphasis has also been placed on "near-shoring," which entails relocating the supply chain to nearby nations such as Mexico or Central and South America regions. Because of their closeness, these markets offer competitive labor prices, shorter lead times, and higher supply security. Washington’s efforts also include the Chip 4 alliance — an arrangement through which the US government aims to strengthen and diversify supply chains among Japan, South Korea, & Taiwan and weaken Chinese involvement on trade and national security grounds.

• Large-capacity batteries; Large-capacity batteries for electric vehicles (E.Vs) and grid storage will be crucial to the economic and national security of the United States as the country moves away from the use of fossil fuels for the generation of electricity and electrifying automotive and trucking fleets. And to maintain its innovative and manufacturing edge in the automotive sector and other key industrial sectors, the U.S. needs to undertake a concerted effort to shore up sustainable critical material supply and processing capacity, expand domestic battery production, and support E.V. and storage adoption.

• Critical minerals and material; In June 2022, the U.S and ‘like-minded’ countries established the Minerals Security Partnership (MSP) to create their own supply chains in critical minerals. China’s dominance of key enabling minerals such as lithium and other rare earths is the single biggest reason why Western countries are looking to build their own supply chains. It is anticipated that there will be a significant increase in demand for critical minerals in the coming decades. These minerals are required for the production of sustainable energy as well as other technologies. Therefore, it is essential to have supply chains that are transparent, open, predictable, secure, and sustainable for critical minerals to deploy these technologies at the speed and scale needed to battle climate change effectively.

• Pharmaceuticals and active pharmaceutical ingredients (APIs); The U.S. has been beset by severe shortages of essential generic drugs and APIs for years. Multiple reasons, including a lack of incentives to manufacture less profitable pharmaceuticals and underinvestment in quality monitoring, have contributed to the development of fragile supply chains susceptible to disruption, both domestically and internationally. In addition, 87 percent of generic API facilities are located outside the U.S. (especially in China). While this has contributed to a cost reduction of trillions of dollars over the past decade, it has also left the healthcare system in the United States vulnerable to shortages of essential medicines. China is responsible for producing approximately fifty percent of the world's APIs and an even higher portion of several vital ingredients. For instance, China supplies eighty percent of the global market for heparin, which is used for blood thinners, and eighty-six percent of certain antibiotics (such as tetracycline/doxycycline). Also, China holds an even greater share of the global market for key starting materials (KSMs), the raw chemicals needed to produce APIs. It is illuminating to look at the example of India, which has built a name for itself as the pharmaceutical capital of the world and is responsible for 20 percent of the world's supply of generic medications. Still, the country depends on China for 80 percent of its APIs and even more of the KSMs used in producing its own APIs. No wonder a new strategy is required to guarantee that Americans have reliable access to the life-saving medications they need.

The Skepticism

It would be unsurprising that implementing the reversal of location selection, redesigning the existing transportation models, and shortening supply chains will be financially costly and take considerable time, particularly for complicated supply chains. Given the uneven geographical distribution of resources worldwide, it is still being determined whether or not such a model could ever be implemented successfully. However, it is reasonable to anticipate that applying such logic would significantly disrupt trade flows, leading to price hikes for end users. Moreover, it is unreasonable to expect a designation of particular states as "trusted" to remain stable over time. This kind of black-and-white thinking ignores the reality of trade and economic policy, both of which tend to be characterized by a preponderance of grey areas.

About the Author:

Rahul Guhathakurta (ORCID: 0000-0002-6400-6423) is a strategic management consultant. A primary investor in IndraStra Global — a US-based publishing company.

IndraStra Global is now available on
Apple News, Google News, Flipboard, Feedburner, and Telegram

COPYRIGHT: This article is published under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License. https://creativecommons.org/licenses/by-nc-nd/4.0/

REPUBLISH: Republish our articles online or in print for free if you follow these guidelines. https://www.indrastra.com/p/republish-us.html