If any forthcoming friend-shoring mandates were to apply such a broad categorization, they would have devastating effects on international trade. After all, friend-shoring will typically mean trading with countries that have similar values and institutions; and that, in practice, will mean transacting only with countries at similar levels of development.
The benefits of a global supply chain stem precisely from the fact that it involves countries with very different income levels, allowing each to bring its comparative advantage to the production process – PhD researchers from one, for example, and unskilled assembly-line workers from another. Friend-shoring would tend to eliminate this dynamic, thereby increasing production costs and consumer prices. While some labor unions would welcome the reduced competition, the rest of us would regret it.
Moreover, it is not even clear that on-shoring or near-shoring production helps to increase resilience or the reliability of supply. In the US, baby formula is supplied by a government-supported oligopoly of four domestic firms that are protected from foreign competition by high tariffs. But, at this moment, there is no baby formula to be had in some US states, owing to problems in just one facility. So much for building resilience through domestic production!
By the same token, concentrating production within a gated community of advanced economies would not necessarily increase the security of the community. As Brexit showed, friends do not always stay friends. Even countries as close in temperament as the US and Canada had serious disagreements during Trump’s presidency.
Even more to the point, existing economic interdependencies can make geostrategic rivals more reluctant to launch missiles at one another. Many observers have noted that China will think twice before invading Taiwan now that it has seen the damage that sanctions are doing to Russia.
But if China were to prepare for an invasion, it would start by reducing its reliance on Western economies, a process that Western friend-shoring would inadvertently advance. Economic entanglements may be messy, but they help keep the peace.
Finally, friend-shoring would tend to exclude the poor countries that most need global trade in order to become richer and more democratic. It will increase the risks that these countries become failed states, fertile grounds to nurture and export terrorism. The tragedy of mass emigration will become more likely as chaotic violence increases.
Friend-shoring is an understandable policy if it is strictly limited to specific items directly affecting national security. Unfortunately, the term’s public reception already suggests that it will be used to cover much else.
Raghuram G. Rajan
Writing for PS since 2003
77 Commentaries
Raghuram G. Rajan, former governor of the Reserve Bank of India, is Professor of Finance at the University of Chicago Booth School of Business and the author, most recently, of The Third Pillar: How Markets and the State Leave the Community Behind (Penguin, 2020).
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