What is Friend-shoring?

It sounds like a great idea. We do not want to remain dependent on foreign manufacturers, so we will onshore manufacturing. We will beat the Asians at their own game by producing more of what we buy, thus leaving their industries in the lurch. That is, leaving them reliant on local markets. To be fair, the population of Asian countries is not exactly tiny.

Anyway, we have high self-esteem and we talk a good game. Transferring manufacturing facilities requires more than tough talk. It requires the personnel who can do the job. And it requires operations that can do the job as efficiently and as cheaply as foreign manufacturers.

It is nice to say that we are going to cut China out of the supply chain, and that we are going to stock the shelves at Walmart with American made goods. And yet, whatever makes you think that those goods will be sold at the same price as the previous China-made goods. And what makes you think that they will be of the same quality.

In other words, onshoring risks producing more inflation. Do we really want that? And whatever makes us think that we have the human capital that is capable of doing the job.

In the first place, as you well know, American schoolchildren are being taught critical race theory and other forms of leftist ideology. Will the children who are taught such subjects be capable of running the robots that prevail in modern factories? And besides, as one does occasionally mention, the grandees of Silicon Valley are running their companies with foreign-born talent, most often from either China or India. Doesn’t that tell us that America has failed to produce the human capital necessary to run those companies?

So, friend-shoring has a downside. We are living in an interdependent world. To think otherwise, and to overestimate our ability to compete, is folly.

Anyway, the Wall Street Journal reported the friend-shoring story, with an emphasis on what it might cost. As for raw materials, if we want to mine them in friendly countries we need to be somewhat cognizant of the fact that the green governments in many Western countries think that mining operations are going to befoul the pristine environment, and thus, that they refuse to allow it. How much oil exploration is being hampered by the greens? How is Germany doing with far less energy from Russia?

And we note that the status of the dollar, recently weaponized by the Biden administration, does not enter into the calculations. If these unfriendly nations find a way to circumvent the dollar, we are in deep doodoo. 

So, geopolitical tensions are rising, and, dare we say, the current administration has been stoking them. It wants to make senile Joe Biden look tough on the world stage. Unfortunately, he and his band of cretins cannot even fake it any more.

As geopolitical tensions rise, Western governments have urged international companies to shift more business to friendly countries. Some critics think that could split the global economy into hostile camps, hurting growth and worsening inflation.

Advocates think “friend-shoring,” as the trend is nicknamed, can protect access to vital raw materials and components, drawing on lessons learned during the Covid-19 pandemic that saw shortages of semiconductors and some other components threaten vital industries.

But many economists fear restricting trade and direct investment to political allies could undo decades of gains from globalization, including raised incomes for hundreds of millions in the developing world and lower prices in the West.

So, Intel and Taiwan Semiconductor are building plants in Arizona. It’s a good thing. And now they are working with the local universities to help them to produce people who can actually work in these factories. They are worried that the immigrants coming up from Central America might not be up to the job. Minor detail, I am sure. 

So, breaking down the world trade order might not be such a good thing. One hesitates to mention it, but the Trump administration, what with its tariffs and sanctions against China, spurred this movement. And, as David Goldman is at pains to point out, it was a genuinely bad idea, especially since imports from China have grown substantially in the aftermath. Go figure.

The Journal article continues, suggesting that we are flexing our trade muscles without reflecting very much on the potential fallout:

They worry that it could place security and political concerns above those of economic efficiency for a much wider range of goods than are necessary for security. And they think it could require countries around the world to choose sides as the global system of low tariffs and rules-based trade that was built in the aftermath of the Cold War fragments into closed bubbles.

And, what happens if friend-shoring produces lower economic growth around the world, and even if it immiserates poor nations in a cycle of poverty and famine. What will happen when the inhabitants of those nations get on the road to the West? How will a flood of immigrants impact the economic outlook?

They calculate that the creation of a two-bloc world would lead to a 5% loss of global economic output over a 10- to 20-year period—equivalent to roughly $4.4 trillion. While friend-shoring could lead to higher prices and lower profits in the West, the WTO economists believe that cost would be borne disproportionately by poorer countries, who gain most from the transfers of technology that globalization brings.

So, friend-shoring seems like a great idea. The practicalities seem to have escaped our policy makers:

The “non-friendly” countries—those that voted against Russia’s suspension or abstained—include China, India, Brazil and Mexico. In total, they account for 35% of all goods imported by members of the Organization for Economic Cooperation and Development, the group of rich countries that includes the U.S. and most of its closest friends.

Shifting so many imports to more friendly countries is probably further than advocates of friend-shoring would want to go, but that figure does emphasize how big an impact it might have.

For central bankers, any shift in that direction would tend to keep inflation higher than in the run-up to the pandemic, even after energy and food prices ease.

Friend-shoring means more inflation. It means that the shelves at Walmart will be stocked with goods that cost significantly more. This will impact the living standards of countless Americans. And of course it means less energy and higher energy prices.

Someone should give some serious thought to these daffy proposals.