What’s the difference between ‘friendshoring’ and other global trade buzzwords?

Global trade and its reliance on supply chains is a complicated business to explain.

And some of the language around trade can be equally hard to grasp. While words such as ‘onshoring’, ‘reshoring’ and ‘nearshoring’ have been in standard use for some time, in the past couple of years, a new term has emerged – ‘friendshoring’.

So, what does it mean, how does it tie in with these other trade buzzwords and what does this signal for the future of supply chains?

This currently in-fashion trade buzzword has arrived out of recent economic crises and strains on global supply chains caused by various shocks to the global economy. These include the COVID-19 pandemic and Russia’s invasion of Ukraine.

Essentially friendshoring refers to the rerouting of supply chains to countries perceived as politically and economically safe or low-risk, to avoid disruption to the flow of business.

The practice has stoked concern within the international community about the possibility of further geo-political fragmentation and deglobalization of the world’s economy – the decline of interdependence between nations, global institutions and enterprises.

The US government, for example, has stressed its intention to obtain components and raw materials from ‘friendly’ countries with shared values to increase security of domestic production.

US Treasury Secretary Janet Yellen set out Washington’s new approach to trade last year: “Rather than being highly reliant on countries where we have geopolitical tensions and can’t count on ongoing, reliable supplies, we need to really diversify our group of suppliers,” she said.

“Friendshoring means… that we have a group of countries that have strong adherence to a set of norms and values... and we need to deepen our ties with those partners and to work together to make sure that we can supply our needs of critical materials.”

Tech giant Apple is one American company to have recently made friendshoring moves, relocating some of its iPhone production to India from China. Currently, only 5% of Apple products are made outside of China, but recent JP Morgan analysis suggests this could rise to a quarter by 2025, Reuters reports.

This describes the process of a company relocating business operations to a nearby country, often with a shared border. “Nearshoring ensures faster speed to market and quicker transit from manufacturers to customers”, explains industry website SupplyChainBrain.

And it’s happening around the world. “Nearshoring/regionalization has increased by 8 percentage points and reshoring by 10 percentage points since our 2021 survey,” Economist Impact writes in its Trade in Transition 2023 global report.

Amid the global supply chain crisis, increasing numbers of companies are investing in the location of plants nearer their target markets. Nearshoring operations to neighbouring countries can also have financial benefits. These include avoiding having to pay import tariffs on goods, as well as cheaper shipping costs.

Mexico and Canada are America’s top two trading partners, according to Visual Capitalist. In 2021, they made up more than $1.2 trillion of the US’ total trade.

While, in Europe, businesses are increasingly looking to nearshore part or all of their production to countries like Turkey, Morocco and Romania. This is as a result of months of supply chain disruption caused by lockdowns in Asia and the war in Ukraine, Manufacturing & Logistics IT reports.

Also known as inshoring or onshoring, reshoring is when a business transfers operations back to its home country. This can be an attractive solution for companies whose supply chains have been disrupted by geo-political events, according to Manufacuring.Net.

It explains that “by bringing suppliers closer to home, companies can reduce their exposure to outside risk… They can be more selective in who they partner with, choosing manufacturers with reliable supplier networks in the countries where they do business.”

According to research by the Capgemini Research Institute, 89% of the executives it surveyed in 15 countries in 2022 regard supply chain disruption as the greatest short-term risk to their organization. It’s report also revealed that 72% of organizations are looking to reshore (or nearshore) production bases closer to sources of demand.

Moving business operations to another country is commonly known as offshoring. This can reduce labour costs and ensure the ready provision of certain skills. It may also mean greater proximity to certain raw materials.

Offshoring is not the same thing as outsourcing, where work is contracted out to an external organization. It’s when a company relocates some of its existing operations abroad.

However, recent changes to globalization as we know it are making offshoring much less attractive to businesses, according to Srinivasan Seshadri, of HCLTech. Writing for the World Economic Forum he says, “the most visible impact of the deglobalization trend will be the urgency to exploit local markets, build proximity to customers, and re-shore and near-shore material suppliers, talent, and operations. He adds “most importantly, reshoring and nearshoring will win them social and governmental approval while simplifying compliance.”

The World Economic Forum’s Annual Meeting in Davos this year focused on the theme of ‘Cooperation in a Fragmented World’. The Forum points out that flows of capital, goods, services and people have boosted productivity and living standards, tripling the size of the global economy over the past three decades. However, it believes tensions over trade and investment are undermining growth and trust.

In a session at the annual meeting, “Relaunching Trade, Growth and Investment”, Ngozi Okonjo-Iweala, Director-General of the World Trade Organization called for a bolstering of global cooperation. And, a move towards “reglobalization” as opposed to trade fragmentation and friendshoring. “A friend today may not be a friend tomorrow,” she warned.