Friendshoring: from buzzword to breakthrough

In April 2022, US Treasury Secretary Janet Yellen spoke to an audience reeling from Russia’s invasion of Ukraine on the dry subject of global supply chains. Some criticised her emphasis on so-called ‘friendshoring’ – meaning the re-allocation of trade to US-friendly countries – as just another Washington buzzword, not a tractable policy.

The months since have proved the sceptics wrong. We believe the friendshoring of global supply chains away from China and Russia is here to stay and has further to run. But we need to separate fact from fiction.

We have written on friend-shoring before when examining India, but in this series, we examine re-shoring’s nascent effects, looking into goods trade, investment and wider impacts.

Deceptive first appearances…

At first sight, the story of global trade is simple. Technological change, and the Cold War’s end, boosted trade’s share of world GDP from 35% in 1990 to over 60% by 2008. The financial crisis arrested this trend, but since then, not much has changed. Despite Trump’s tariffs, COVID-19, and sanctions on China, the globalised world created since the 1990s has persisted relatively undisturbed.

While true in aggregate, this analysis misses underlying forces shaping global trade, with geopolitics increasingly important. Over the past year, as the US remained resilient and China weak, global trade (both exports and imports) gravitated more towards the US, with US-allies (Japan, Korea, Germany and Taiwan) in the vanguard.

Moreover, US trade data signal that China’s advantage in manufacturing exports is waning. Since Trump’s assumption as US president, China has lost 10% of its share of US manufacturing imports, with rivals such as Mexico, Vietnam and India picking up the slack. The re-ordering of global manufacturing continues even as aggregate trade holds steady.

Made in China (via Cambodia)

Yet there is room for doubt. Chinese manufacturers are alleged to be skirting US controls by establishing plants in Vietnam and Thailand to rebrand goods made in China for US export. This is reflected in the co-movement in Chinese exports to (and US imports from) Southeast Asia after the change in US policy. If we account for this transfer, roughly two percentage points (ppts.) of China’s erosion of US market share is down to re-classifying of existing Chinese trade.

Another factor is methodological change. If we correct for that, a further three ppts. of China’s US import penetration is restored.

Only half-real… but still real

Having untangled vagaries in the data, about half the loss of China’s market share in US manufactures is down to ‘genuine’ reshoring, instead of reporting distortions or re-routing. This is roughly $90bn per year, no small figure, giving other emerging markets (particularly India and Mexico) scale in a sector critical to development.

The extent and durability of this trend, which could potentially transform global economic geography and dethrone China as ‘the world’s factory’ is likely to depend on investment flows. This will be covered in our next instalment of this blog series.

This is the first in a series of blog posts covering global ‘friendshoring’; future instalments include a review of changes in investment flows and a discussion on the trend’s impact on the world’s economy and geopolitics.