We can't be friends
When should you part ways with old friends, re-unite with others, or make new ones?
Dear sublime reader,
Today I’d like to talk about a clever use of language I stumbled upon early this year: Friend-shoring.
Here’s why.
One of the key ingredients of a great campaign is language. That is, using visual words to create mental images or describe complex concepts. So they are easy to grasp, digest, and share.
What does this look like in the wild?
In 2000 British Petroleum hired Ogilvy and Mathers to help craft and shape what was perhaps one of the most powerful campaigns of recent times. And so the term carbon footprint was coined and popularised—partly by connecting it to personal virtue.
But that’s an essay for a different day.
Now, friend-shoring is not an entirely new concept.
Previous language has been used to describe “restoring resilient supply chains”—but this barely caught the media’s attention. Let alone the general public’s. Too abstract. Too out of reach.
Until early this year.
So what is friend-shoring?
It’s starts and ends with supply chains.
The unrestricted movement of goods and services is the heart of a healthy supply chain. However, when the flow of physical (or digital) products is restricted, it leads to shocks and many forms of economic havoc—
temporarily in some cases e.g. empty supermarket shelves due to panic buying.
or permanently in others e.g. endless sanctions that further choke business activity.
It’s no secret the pandemic exposed how fragile the supply and transport of essential goods and services is in most nations. This fragility led to panic buying that added strain on already weak supply chains. Today, that strain is further complicated by other factors such as the Russo-Ukraine war, extreme weather (e.g. floods, drought, bushfires), and increased demand following the lockdowns.
It’s a whirlwind.
Add to that list an ongoing economic war that is ushering in a balkanised world economy.
As we’ve seen over the last few months, nations no longer need to engage in a military war. Instead, they can weaponise economic levers such as access to currency or energy resources.
Of note: as we switch to an electrified world, energy concerns will rise even further. As of 2021, China refined 60% of the world’s lithium and 80% of the world’s cobalt. Both minerals are core inputs for high capacity batteries used in electric vehicles and home batteries.
The complex web of interconnected networks that made the global economy run efficiently gave us timely deliveries from countries on the other side of the world. Which meant that before the pandemic—
Everyone everywhere could trade with anyone anywhere.
Here’s an example closer to home:
In 2016-2017, Australia spent about $272 billion (about 16% of gross national income) importing close to 6,000 different products—from over 200 regions. Sitting at the top of these imports were: cars and car parts, specialised equipment, fuel, pharmaceuticals, and chemicals. And while the products were sourced from over 200 locations, the main suppliers were China, U.S. Japan, Thailand, and Germany.
The case is likely similar for other countries. They might import food from the Russia-Ukraine wheat belt, electronics from China, or pharmaceuticals from Germany. The environment of everyone everywhere trading with anyone anywhere brought efficiency with it. And insane wealth.
Everyone could be friends.
It meant you could focus on producing what is most profitable; then use your earnings to buy what you don’t or can’t make locally.
But—
This efficiency came with fragility baked into it. Unrest in a distant country could disrupt the availability or pricing of obscure products in your local neighbourhood.
So now, nations and business have three questions to ponder:
Which resources are critical to our well-being?
Who can we rely on to supply the resources that we can’t produce locally?
How resilient is our distribution/transportation network?
To answer these questions, some political leaders have floated friend-shoring as the likely remedy.
The ultimate goal is to create resilient supply chains that are immune to shocks, or can bounce back quickly from disruptions.
How?
By trading primarily with friendly countries who share your values or interests and by strengthening production at home. Hence—
Friend-shoring is “deciding to make strategically important goods at home or sourcing them from allies”.
Say for example: Europe buys gas and rare earths from the U.S., then supplies Australia and Canada with semiconductor chips—while simultaneously reducing the amount of stuff bought from Russia or China.
The big picture
Again, every nation has a different answer to which resources are critical to the well-being of its citizens. Let’s look at two publicly available examples:
Australia’s Productivity Commission, has a report investigating what the critical products are in this July 2021 report. That is, products that are vulnerable to disruptions and if absent, would endanger the economy, national security, and Australian’s well-being (e.g. human medicine, and chemicals inputs for water treatment).
The U.S. answers this question through the lens of national security, economic security, and technological leadership. This June 2021 White House Report (shown below) calls for the U.S. to deepen its economic ties with friendly, “like-minded” countries—months before the Russo-Ukraine war broke:
Most nations place a premium on internal social and economic stability.
So I presume each nation will have a variation of this framework—depending on the imperatives and challenges they find most pressing.
Once a nation identifies the critical resources it needs, it will move to step two. Check the geopolitical thermometer and align itself with friendly nations. And end risky or unpredictable relationships.
Does friend-shoring really matter?
I think so.
Friend-shoring policies will affect businesses—and in turn the economy.
We’ve seen companies like Yahoo, LinkedIn, and Epic Games (the team behind the viral game Fortnite) stating that they plan to either exit or reduce their presence in China.
When faced with choosing between uncertainty and fines or complying to policies, most business will choose the latter. The financial and political risks are too expensive to bear.
An obvious example would the French cement company that recently got slapped with a US$778 million fine for its payments to ISIS during its operations in Syria.
I’d also like to point out a policy oriented example: the evolution of how NATO sees it’s sphere of influence.
In 1999, the NATO’s Strategic Concept was optimistic: “NATO and Russia have agreed to give concrete substance to their shared commitment to build a stable, peaceful and undivided Europe. A strong, stable and enduring partnership between NATO and Russia is essential to achieve lasting stability in the Euro-Atlantic area.….”
Fast forward to 2022, NATO’s Strategic Concept is a lot more precautious: “The deepening strategic partnership between the People’s Republic of China and the Russian Federation and their mutually reinforcing attempts to undercut the rules-based international order run counter to our values and interests.”
I believe swings like this will form part of the new normal—and provide the extra fuel needed to accelerate friend-shoring and reshoring.
Some friends will reunite, others will part ways.
At least until the fog settles.
On the flip side
Now, let’s pause and look at the counterpoints to friend-shoring.
Samanth Subramania from Quartz argues that while friend-shoring sounds good in theory, it might falter due to practical considerations:
Friend-shoring has financial downsides—the global economy stands to shrink by about 5% (or approximately US$4 trillion), as per a World Trade Organisation Study.
Friend-shoring will harm poorer countries—particularly those that get isolated or left out by design or otherwise.
Friend-shoring is easier said than done—to make the iPhone, Apple buys components from 43 countries (re-configuring these supply chains will be a costly uphill task).
Friend-shoring will increase prices—companies originally offshored the making of goods to countries with cheaper labour or production costs. Exiting these countries will inevitably increase prices.
Zooming in
At this point, I think it’s safe to say much of the rhetoric around friend-shoring has been aimed at China (and Russia to a lesser extent). A trend that began in 2007.
As ongoing trade trade-offs intensify, we can connect the dots and look for the implications of a U.S.-China decoupling.
China has dominated the manufacturing space for the last few decades and friend-shoring’s goal is to reverse this. If followed through, the parting will create echoes throughout the globe.
So who benefits?
To answer this, there are three things to consider:
First, what products can we make?
Let’s look at the critical industries that come to mind when picking your friends or deciding what to make at home. We can refer to UNIDO’s classification which offers a three tier taxonomy.
Low technology. Resource heavy industries. Think food products, textiles, clothes, wood and wood products, petroleum, furniture. Nations with large populations and low cost of labour are likely to benefit.
Medium technology. Industries that have some value add. Think plastic and rubber products, basic metals, boats and ships, installation and repair of machinery, non-metallic minerals, and manufacturing (except medical/dental instruments). Medium income and some emerging nations stand the most to gain.
High technology. Industries with higher R&D intensity. Think cars, advanced manufacturing, computers and electronics, weapons and ammunitions, semiconductors, medical instruments, heavy machinery, pharmaceuticals, chemicals and chemical products. This is a tier China currently excels in—as highlighted by Apple’s CEO Tim Cook back in 2017. High income countries stand to gain the most here.
As nations look to reduce their reliance on non-allies, they will seek to bring the making and sourcing of critical resources back home. And where this is not possible, find new friends they can rely on.
Second, who can we befriend?
When it comes to working out who to befriend, RaboResearch from Rabobank provides a handy framework. Choosing who to part or reunite with will be based on:
Geopolitics (is the country a friend of Russia/China/U.S.?)
Domestic political stability (is it safe?)
The level of infrastructure, which encompasses some landlocked countries (does it suffice?)
Its labour potential (is the country too small, or unable to offer spare workers?)
Its cost of labour in the three different product sectors: low, medium, and high technology.
Some nations might also choose to wait and see who wins before over committing to one side or the other.
Third, what are the current trends?
Let’s look at a few examples of friend-shoring currently motion:
Australia. Canberra intends to spend over $1 billion to win friends and influence nations in southeast Asia and the Pacific region. And support infrastructure has been laid out to promote local growth in medium and high technology sectors.
U.S. Since 2017, the U.S. government has (through programs such as Prosper Africa) sought to foster friendships across Africa—investing or facilitating close to US$50 billion in deals across 45 African countries. With companies ranging from Universal Music Group, Netflix, Y Combinator, Microsoft, Goldman Sachs and many more investing in array of ventures within the Continent.
India. The south Asian country looks inward. India intends to expand into the high technology space by investing US$30 billion to shore up its semiconductor industry. This move is estimated to generate around US$110 billion by 2030 if rolled out successfully.
Turkey. Ankara has been deepening its ties with Africa. Libya is now classified as a “friend and ally”—security guarantees for Libya and hydrocarbons deals for Turkey.
In short, nations that re-position themselves stand to win bigly. Either in economics, military, or culture. Others will take advantage of the current disorder to secure their best interests.
In their words
Here’s what others are saying:
“Australia drank the free-trade juice and decided that off-shoring was OK. Well, that era is gone … We’ve got to now realise we’ve got to really look at onshoring key capabilities.” Andrew Liveris, former special adviser to the National COVID-19 Commission
“Favoring 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. We should also consider building a network of plurilateral trade arrangements to incorporate elements of the modern economy that are growing in economic importance, especially digital services. We should harmonize our approaches to protecting the privacy of data. And a modernized trade system will also require the ability to effectively enforce trade policies and practices, both multilateral and bilateral.” Janet Yellen—US Secretary of the Treasury addressing the Atlantic Council.
“A resilient supply chain is one that recovers quickly from an unexpected event. Our private sector and public policy approach to domestic production, which for years, prioritized efficiency and low costs over security, sustainability and resilience, has resulted in the supply chain risks identified in this report. That approach has also undermined the prosperity and health of American workers and the ability to manage natural resources domestically and globally.” 2021 White House Report
Want to go deeper?
2020: Newsweek calls it “ally shoring”
2021: White House Report
2022: Janet Yellen’s speech calls for friend-shoring
2022: RaboResearch dissects the topic
2022: China’s strengths
Final thoughts…
To say we are wading through uncertain times is an understatement. Supply chain maps are getting redrawn and the globalisation has slowed down.
I think friend-shoring is hardly friendly or about traditional friendships. But it is emerging as the primary state of play in the global economy.
At a human level, I believe you’ll find fear and the desire for self-preservation underneath all this. Fear of unpredictable neighbours. And the uncertainty arising from growing tensions within and between nations.
This fear is partly understandable.
From a birds eye view, it may seem that the international rule of law is receding. A stronger actor may march in and take what they want from you. Or another may arm-twist you into submission by leveraging your dependence on their infrastructure or resources.
This is true whether you are friends or not.
As we’ve seen in recent months, nations can opt to abruptly restrict food, tech, or energy exports to secure supply for their locals.
Friend-shoring is therefore a logical response to these concerns.
Moving forward, I think self-sufficiency will be preached as the only true antidote. It will likely be clothed as economic or national protectionism. But it is an uphill task to be self-sufficient (thanks to the constraints of geography).
Resilience, or the ability to bounce back quickly from shocks, should—I believe—be the priority in unsteady times.
So what next?
The most prudent act is to identify which critical resources you need—resources that if absent will affect your well-being or stability.
Onshore what you can, and build reserves for what you cannot.
For example, as a nation, you could assess whether you’re a net exporter or importer of food. If you’re a net importer of food (or fertiliser) this poses a glaring risk for food security. This could easily lead to social and political unrest.
The same goes for net energy importers. So your focus should be to secure food or energy from other sources or build internal reserves from your current suppliers.
Though it emerged as a concept in 2020, friend-shoring only began picking up speed in 2022.
There are deeper reasons for why it’s happening now (something I’ll cover in future writings). But I think friend-shoring is a large part of what the world might look like in 2040. And in addition, new fruitful opportunities will arise for those clever enough to spot and embrace them.
Unlike the golden age of globalisation—where everyone everywhere traded with anyone anywhere; the future will likely consist of clusters of countries trading with each other. And we’re yet to see whether this will limit market sizes available to business.
However—
The future is unknowable. There is always the possibility that we might experience a u-turn and revert back to increased globalisation and relentless growth.
But I personally think it’s unlikely and we should prepare—unless the metaverse takes off.