The Rise of Friend-shoring with Benefits (and Challenges)

Industry News
May 13, 2024
Nissim
The Rise of Friend-shoring with Benefits (and Challenges)

Against a backdrop of significant geopolitical and macroeconomic uncertainty, a recent report from the ECB illustrated that companies anticipate a growing trend towards near-shoring, diversification, and/or friend-shoring of their supply chains over the next five years. These are not just trade buzzwords – one of UNCTAD’s most recent Global Trade Updates shows that some countries are demonstrating a preference to engage in economic cooperation with trade partners they are politically aligned with, shaping trade policies.

'Friend-shoring' has long been a cornerstone of the global supply chain, but is growing in popularity amid a growing list of supply chain disruptions and the climate crisis. The criteria for friend-shoring policy arrangements typically include factors such as geopolitical stability, existing trade agreements, and overall cultural synergies. In other cases, countries that can provide a reliable supply of sector-specific raw materials will be looked at favourably by countries whose domestic production is lacking, leading to international cooperation. In today’s market, a robust friend-shoring policy can enhance supply chain resilience by reducing exposure to geopolitical tensions, trade barriers, and ongoing trade fragmentation. Due to ongoing supply chain disruption, businesses are being forced to re-evaluate their trade routes like never before. In some cases, shipping companies have faced tricky dilemmas – risk transportation through the Suez Canal or send vessels an extra 4,000 miles around Africa for more secure trade. 

There are plenty of examples of how geopolitical tensions – such as the US-China trade war – have encouraged greater levels of friend-shoring. The implementation of import tariffs on various Chinese goods entering the US during the Trump administration, resulted in a 7.2% decline in the country's import share between 2017 and late 2023. The deterioration in US-China relations benefited Mexico during this timeframe, which witnessed a 2% increase in its share of imports from the United States between 2017 and 2023. 

Benefits of friend-shoring

By sourcing critical materials from countries with political alignment or friendly relations, businesses reduce the risk of disruptions caused by geopolitical tensions, trade disputes, or regulatory changes. This geopolitical stability provides a foundation for reliable and uninterrupted supply chains, minimizing the impact of external shocks on production and operations.

Friend-shoring also fosters closer economic integration and trust between trading partners. Friendly countries with shared values or cooperative agreements are more likely to engage in transparent and mutually beneficial, secure trade practices, helping businesses drive  economic growth, improve their market position while achieving greater visibility, agility, and responsiveness to market changes and customer demands. Shared cultural norms, language, and business practices streamline communication and negotiation processes, reducing misunderstandings and conflicts – facilitating smoother interactions and strengthening business relationships. Friend-shoring also enables businesses to leverage complementary strengths and capabilities across different regions. By tapping into the expertise, resources, and innovation ecosystems of friendly nations, companies can access new markets, technologies, and improve business operations. 

Challenges of friend-shoring

However, friend-shoring also presents several challenges that companies must navigate tactfully. While this trade practice can undoubtedly unlock unique synergies, it can often overlook cost considerations and supply chain efficiencies. Relying solely on geopolitical relationships can limit access to diverse and competitive suppliers, potentially resulting in higher production costs and reduced profitability. As we’ve seen in the past, political alliances can shift over time, leading to uncertainties and disruptions in the supply chain. Additionally, friend-shoring may face opposition or backlash from stakeholders who prioritize ethical sourcing practices or environmental sustainability. The growing prevalence of friend-shoring also increases the risk of segmenting the world into rival trade blocs, and recent research from the International Monetary Fund and the World Trade Organization indicates that this type of rift could incur major losses in GDP, in the ballpark of 12% in some regions.

In today’s increasingly congested and uncertain trade landscape, balancing geopolitical considerations with supply chain efficiencies is a delicate balancing act. As companies strive to mitigate risks and optimize their supply chains, they must carefully evaluate the trade-offs and implications of friend-shoring in today’s hyper-competitive environment. Companies must stay firmly attuned to evolving supply chain dynamics, and hedge their supply chain bets at every opportunity. By cultivating long-term relationships with trusted trading partners, businesses can navigate market volatility and capitalize on collaborative opportunities, laying the foundation for sustainable growth. However, a degree of operational agility is required, ensuring businesses can pivot and adjust their strategy in the event of trade shocks, alliance shifts or unforeseen disruptions.

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