With political tensions increasingly impacting global trade relationships — in particular between China and the US — the term ‘friendshoring’ has entered the vernacular, representing the realignment of trade networks along geopolitical lines.
The United Nations Conference on Trade and Development (UNCTAD) last month noted a significant rise in the political proximity of trade since the second half of 2022, suggesting a shift in bilateral trade preferences toward countries with similar geopolitical stances, leading to a concentration of global trade within major trade relationships.
“Trade among geopolitically close countries is increasing, whereas trade among geopolitically distanced countries is declining,” says Hung Tran, non-resident senior fellow with the Atlantic Council’s GeoEconomics Center.
While weaponising economic relationships to serve national security and geopolitical interests is nothing new, the US’s trade war against China is taking the phenomenon to a “new level”, creating a clear bifurcation of trade activities, says Mr Tran.
The imposition of tariffs on a series of Chinese goods into the US — starting in 2018 under the Trump administration — has seen the country’s share of imports fall by 7.2% between 2017 and late 2023, equivalent to around $225bn, according to analysis by Deloitte.
Mexico has been the primary beneficiary during the period, with thanks in no small part to the United States-Mexico-Canada Agreement, an expansion of the North American Free Trade Agreement signed in 2020. The country saw its share of US imports rise by 2% between 2017 and 2023.
China, for its part, has successfully “laboured its trade activity away from the US, Europe and Japan, and to favour Global South countries”, Mr Tran notes.
China’s trade with the Global South totals $2.25tn per year, compared to its trade with the US, Europe and Japan, which sits at around $2tn, according to Mr Tran.
“That trend will continue: there’s a clear diversion of trade away from unfriendly countries in favour of friendly countries,” he noted, with US trade with southeast Asian countries set to continue to proliferate.
Taiwan is a particularly interesting case in point, given its increasingly chilly relationship with China. Taiwan’s trade dependence on China fell by 2.2% in the 12 months to end-September 2023, while its dependence on the EU and US increased by 1.5% and 1.3%, respectively, according to UNCTAD.
Yet, the impact of friendshoring on global trade — and even on US-China trade — should not be overstated. In its trade and development report for 2023, UNCTAD noted that trade between the world’s two largest economies is rising, with total imports of goods to the US from China returning to their pre-Covid-19 peak.
Bilateral imports of both goods and services from China to the US reached their highest levels in 2022 at $564bn, boosted in part by more products without tariffs. The US still remains the main destination for exports of merchandise from China, followed by Japan, Korea, Vietnam and India.
And while China accounts for a lower share of US imports, the Asian superpower holds an increasingly dominant position in global supply chains, a position that Mr Tran describes as a “double-edged sword” for the US and other states looking to shift trade towards closer political allies.
As the trade in intermediate goods in particular continues to expand, so too does China’s export growth, developing a much more “China-centric globalisation”, says Mr Tran.
“Looking at the trade in intermediate goods can provide a much more accurate assessment of the global supply chain,” he continues.
What will the impact be?
UNCTAD forecasts that global trade contracted by around $1.5tn (equivalent to 4.5%) in 2023, with a diminished demand in developed nations, underperformance of east Asian economies, and a decrease in commodity prices all weighing heavily on the trade of goods in particular.
Andrei Quinn-Barabanov, supply chain industry practice lead and senior director at Moody’s Analytics, says that government tariffs and sanctions will continue adding to the complexity of trade, thereby adding cost to supply chains.
Strategic sourcing of goods, services and materials will be at the fore of trading partners’ minds, and friendshoring is likely to be an increasingly prevalent trend, he says.
The International Monetary Fund last year warned about the effect of disruptions to supply chains and commodity markets resulting from such moves on domestic growth and inflation.
Friendshoring is likely to progress in a selective way, focusing on specific and critical areas such as semiconductors or rare earth elements, rather than widely across all sectors, according to Mr Tran.
Nevertheless, economic activities increasingly determined based on national security and geopolitical grounds rather than purely commercial calculations may hinder efficiency, he adds.
As supply chains respond to shifts in trade policy and geopolitical tensions, Mr Tran predicts that the US’s friendshoring strategy, together with China’s countermeasures, will deepen the global division into two economic spheres in the near future.
