Implications of ‘friendshoring’, the newest term in global trade, on China’s dominance as the world’s manufacturing hub.
According to UN research, as geopolitical conflicts increasingly distort supply networks, there has been a noticeable rise in trade between politically aligned nations and a commensurate decline in the diversity of trade partners. Despite a general decline in the value of commodities traded, friendshoring, or bilateral trade between nations with similar political viewpoints, has increased by more than 2% in the year since Q3 2022. A study released by the United Nations Conference on Trade and Development (UNCTAD) claims that at the same time, there has been a concentration of international trade within significant trade agreements.
According to the survey, sanctions imposed on Russia after its invasion of Ukraine have been a major factor in the transformation that has occurred throughout most of the West. When comparing Q3 of 2023 to Q3 of 2022, Ukraine’s reliance on trade with the EU increased by 10%. Trade dependence is determined by dividing bilateral trade by total volumes. Russia’s reliance on China grew by 8% during the same 12-month period, while its reliance on the EU decreased by 6.4%. Russian trade flows have been significantly altered by sanctions and de-risking, especially in the energy sector. Global trade patterns are also being impacted more broadly by the trade disputes between the US and China. In a time of growing globalisation, heightened geopolitical unrest, and changing economic conditions, companies everywhere are continuously assessing their resilience and sustainability plans. This is where ‘Friendshoring’ comes in.
‘Friendshoring’ is a relatively new idea that has gained popularity recently. It is a strategic approach to outsourcing or offshoring that gives preference to nations with which a company’s home country enjoys cordial diplomatic, economic, or trade connections. This new term in commerce is a result of recent economic downturns and stresses on global supply networks brought on by a number of economic disasters. These include Russia’s invasion of Ukraine and the COVID-19 pandemic.
A lot of nations have already started to implement friendshoring in their own ways. An increasing number of businesses are diversifying their operations outside of China by relocating to other nations, especially for sensitive sectors, in response to escalating trade and political tensions, rising labour costs in China, and the country’s long-term demographic shift. Nevertheless, China continues to provide a multitude of strategic benefits, including extensive supply chains, advanced infrastructure, and an abundance of people, experience, and know-how. Furthermore, China continues to be one of the largest global consumer marketplaces, drawing businesses from all over the world. Companies that are already present in China are unlikely to completely exit the market for these reasons. Rather, in an effort to diversify operations and reduce risks of trade and supply chain disruption, many investors are opting to augment Chinese operations with inexpensive inputs sourced from industrial facilities in countries like Vietnam and Indonesia. This production model is commonly referred to as ‘China+1’, even if the specific country in question determines how these operations are structured differently.
The nations that stand to gain from friendshoring are usually those with highly developed infrastructure and supply chains that are integrated with the larger region and the final market, together with low labour and operating costs. Malaysia, Vietnam, Indonesia, and India are among the countries on the list of candidates for businesses wishing to continue operating in Asia. While South Korea and Japan may be good places for high-value production and technological innovation, these nations also provide cheap alternatives to China. Western nations, in particular, stand to gain from strong trade and political ties with their home countries.
The ten ASEAN nations, which have the advantages of reduced costs and membership in numerous multilateral trade agreements that promote commerce in goods, are among the nations that stand to gain the most from friendshoring or a China+1 approach. One of these agreements is the free trade area (FTA) between China and the ASEAN nations, which removes tariffs on most commodities exchanged between the two. Over the course of the next 20 years, the Regional Comprehensive Economic Partnership (RCEP) seeks to eliminate tariffs on 90% of the items that are traded among its member nations.
‘Friendshoring’ is a relatively new idea that has gained popularity recently. It is a strategic approach to outsourcing or offshoring that gives preference to nations with which a company’s home country enjoys cordial diplomatic, economic, or trade connections.
Businesses looking to reshore operations to Southeast Asian nations can still take advantage of integrated supply chains thanks to these treaties. They may be able to continue obtaining parts and materials from China at a lower cost and with less delay thanks to the regional trade agreements. The treaties also make it simpler for businesses to access new markets. This includes the sizable consumer bases in rapidly expanding economies like Malaysia and Indonesia, as well as more expensive nations like South Korea and Japan. When examining the potential locations in greater detail, the ASEAN member countries of Indonesia, Malaysia, and Vietnam stand out as the best options because of their sizable populations, advanced supply chains and industries, high potential for growth, and cordial ties with the US and Europe.
But are foreign businesses actually leaving China? Despite a lot of talk about the advantages of friendshoring, it is important to assess how much of this trend is actually in place and whether it is possible to lessen dependency on China. While corporations may choose to reshore to other Asian nations, China will remain an integral part of the global supply chain despite the world’s heavy reliance on the nation for its wide range of components and raw materials. As stated in a Rhodium Group analysis, diversification will not necessarily result in a reduced reliance on Chinese inputs and suppliers in the short to medium term because global value chains are so entangled with China.
The Chinese government is aggressively working to raise the country’s industry up the value chain, putting a greater emphasis on high-end and advanced manufacturing, and depending more on the service sector and domestic consumption for long-term economic growth. The government is aware of the significant workforce changes that are taking place in China.
Therefore, as China evolves toward being a service-oriented economy, its population ages and the workforce decreases, and labour costs rise, it may be inevitable that corporations would opt to reshore in a lower-cost nation. But China’s manufacturing innovation, its advantages in the supply chain, its vast customer base, and its advantageous access to numerous countries through bilateral and multilateral trade agreements will probably keep it competitive. So, while the global practices keep on increasing, countries that are being affected by it will be devising newer combative tactics, all in the aspiration of staying ahead of the supply chain curve.
