Friend-Shoring is the Frugal Future of Trade

As firms and governments seek to adjust to a new normal of uncertainty and tense geopolitics, the concept of friend-shoring has emerged as an alternative model for global trade. The term was coined to describe the shift towards supply chains that skip ‘unfriendly’ countries in favor of ‘friendlier,’ more reliable nations.

Friend-shoring is being touted as an affordable alternative to reshoring—bringing manufacturing back from overseas— to reduce disruptions, delays, and increased production and transportation costs. Shorter supply chains and friendlier conditions should allow firms more security, transparency, and control over their supply chains.

In addition, Western governments hope that restricting trade to allies will secure supply chains for essential goods and create an opportunity to reduce the leverage that powers like China and Russia have over trade and the global economy.

In the short-term, friend-shoring seems like a plausible solution to the current supply chain crunch. In the long run, detractors argue that this shift could worsen inflation, hurt economies, and fragment the world into blocs.

Regardless, in the face of uncertainty, proximity and friendlier conditions are invaluable assets for firms. Many have already started replanning their supply chains and setting sights on alternative suppliers, manufacturers, and locations.

While full-scale friend-shoring may not be an option for some, there’s never been a more crucial time for supply chain leaders to rethink their approach and integrate new practices to reduce vulnerabilities in the future.

Agreements among allies: a new model for global trade

China’s handling of the Covid pandemic and, more recently, the events of the war in Ukraine have made leaders in boardrooms and the halls of government painfully aware of the perils of a globalized economy in which everyone plays by different rules.

There is growing consensus that bringing production back home or limiting trade to allies is a much safer bet going forward than a high-stakes gamble with frenemies that can pull the rug out from under at any time.

Policymakers and private firms have already started pushing toward re-planning supply chains. In April, US Treasury Secretary, Janet Yellen, highlighted friend-shoring as the key to reducing economic risk. Later in May, the Indo-Pacific Economic Framework set up a trade partnership between a group of ‘friendly’ nations, including the US and several countries in the Asia-Pacific region. China was notably excluded from the agreement.

In addition, the US and the European Union plan to spend billions of dollars to incentivize companies to move production to friendlier territories. As nations and businesses seek to avoid the hardships they’ve endured over the past three years, these agreements will likely become more common—along with better incentives for adhering to them.

Reimagining supply chains: striking the right balance

Securing supply chains will undeniably come at hefty costs that could linger and become permanent. For some, the transition–even if partial–could take years and require a significant upfront investment.

Beyond costs, there are other challenges to friend-shoring. Allies may still be lagging in infrastructure and technology or suffer from workforce quality problems. And in some cases, it may be impossible for firms to find substitutes or stray too far from where they source raw materials.

Lastly, friend-shoring alone will not make for more reliable supply chains. Problems can still arise on friendly territory and hyper-focusing on dependability can end up hurting supply chain diversity and productivity. Diversification remains the best safeguard against uncertainty—and a major deciding factor in a firm’s ability to respond and adapt to a changing world.

Striking the right balance between security and productivity will be essential for making the most of new opportunities without sacrificing competitiveness. Leaders—especially those managing critical supply chains—must carefully weigh the options and decide whether paying a premium to secure production and increase security is a worthy investment.

Whether you’re searching for a new carrier or planning a major strategic move, CTSI-Global’s data-powered tools can help you make the right decision every time. Contact us and get the support you need to take on any challenge.