Someone once asked me to define supply chain in a single phrase. Rather than talking about factories, spreadsheets, warehouses, or cargo ships I simply said that “Supply chain was the intersection between marketing ambitions, geopolitics, and the physical world.”
In a world where everything feels digital and you can work from anywhere, we are still bound by the realities of place. Borders still matter. Whether it dairy quotas that prevent some cheeses from being imported from Wisconsin to Canada or the fact that California has border control with other states to keep other vegetables out, regulation shapes what commerce can and shouldn’t do.
As someone who grew up watching the history channel and later consuming the Wall Street Journal, I grew to love geopolitics and business. One of the key lessons from both is that commerce (and therefore supply chain) is a lot like water, it’ll find the path of least resistance. If you don’t like where the water is flowing you can place obstacles to slow it down or a dam to completely divert it. This is exactly what governments do as well.
Over the past few decades, government has essentially thrown a few rocks into the stream to slow things down from time to time. However, today’s changes feel more like the Army Corps of Engineers trying to tame the Mississippi river. As the world pulls back from globalization in favor of regionalism and a conscious decoupling from China is underway, a new concept called “Friendshoring” is emerging.
Countries are now grappling with the complexities of balancing economic efficiency, strategic interests, and shared values, friendshoring provides a framework for understanding and responding to these challenges.
A Brief History Lesson:
It all started with Offshoring
Between 1990 and 2016, offshoring dominated sourcing strategy. With the end of the cold war, growth in containerization, and pushes for free trade regulations like NAFTA and the WTO companies scoured the world looking for low cost options and in the process lifted millions out of subsistence poverty. The focus was on finding the most efficient way to produce a product, often by moving production overseas, usually to Asia. With lower costs, companies are able to produce more and gain more and more market share which creates a self reinforcing loop. This leads to the rise of large, specialized multinationals (meganationals) like Taiwan’s TSMC, which produces 56% of the world’s silicon wafers, and Foxconn, the electronics manufacturing giant responsible for products such as the iPhone.
The relentless pursuit of lower costs resulted in a massive wave of consumption and trade imbalances for importing countries. The interests of meganational corporations became one and the same as the national interests (Samsung and South Korea I’m looking at you). While this generally meant lower prices for consumers and the success of businesses like Walmart and Amazon, it also contributed to a hollowing out of the manufacturing base and middle class in affected industries.
Governments and political parties around the world almost uniformly promoted free trade agreements and welcomed China into the World Trade Organization (WTO) to facilitate economic efficiency. The prevailing rationale was that the net benefit for society and consumers would outweigh the negative impacts on certain industries or communities. Additionally, it was believed that fostering strong trade relationships would reduce the likelihood of large-scale conflicts.The induction of China into the WTO was a watershed moment and proved to be the catalyst to creating a free trade world. However the initial promises of free trade haven’t exactly played out over the past 10 years and there has been a slow but very real shift in the global manufacturing base.
Nearshoring
Nearshoring aims to strike a balance between efficiency and service by moving production closer to home, primarily in North and South America. This shift has been driven mainly by freight costs and supplier lead times, as businesses seek the benefits of lower-cost labor while avoiding the long lead times associated with offshoring. This was especially important during Covid. At Mirror we were able to avoid a lot of the headaches our peer groups faced in large part because we produced close to our main market. Countries like Mexico and, to a lesser extent, Canada have significantly benefited from this trend.
Reshoring
Sometimes being close to home isn’t enough. Reshoring focuses on bringing production of strategically important industries back to the United States. These industries are usually tied to national security interests and often require substantial government support in the form of subsidies or large defense contracts. The goal of reshoring is not to produce at the lowest cost or the most efficiently, but rather to avoid strategic vulnerabilities that could be exploited by adversaries.
The key thing about Reshoring vs Offshoring is that their objectives are completely different. Offshoring is about maximizing efficiency while Reshoring is about maximizing resiliency. Examples of reshoring include US-based apparel companies that primarily produce military uniforms, even though the cost would be dramatically lower elsewhere. Another notable example is the CHIPS Act, which allocated $50 billion toward semiconductor manufacturing in the US, albeit with major strings attached.
The Emergence of Friendshoring
What is Friendshoring?
Friendshoring is a new trend that involves relocating strategically important industries to friendly allies. The goal here is to gain the resilience a country needs while still gaining influence and leverage that comes from trade. This approach effectively represents a return to government-led industrial trade policies that prioritize shared values and interests over pure economic efficiency.
Countries chosen for friendshoring may have preexisting defense relationships, like Australia or the UK, or an abundance of valuable commodities, such as Canada with oil, or Chile with nickel and cobalt. The goal is to use economic influence to shape a coalition in line with shared interests, as opposed to simply pursuing the lowest cost option.
A prime example of reshoring is the decision to build semiconductor fabs in Arizona, despite the state’s regulatory costs nearly doubling the construction cost of these water-intensive factories in a seismically active desert. Additionally, the difficulty in finding technical talent has led to the need to likely import thousands of workers to support factory operations probably from Taiwan. The reshoring approach emphasizes the US defense industries self reliance and access to semiconductors in the event of a conflict.
In contrast, friendshoring presents an alternative: relocating a semiconductor fab to Canada. Cities like Toronto and Ottawa offer geographic proximity to the US, a stable environment free from seismic activity, and no shortage of water resources. Furthermore, these locations boast an existing manufacturing base and a robust immigration system that could support the construction and operation of the factory. Other than being in the US, the US would retain virtually all of the strategic benefits at a likely lower cost. Seems like a win win to me
So why friendshoring now?
The world is becoming increasingly multipolar, necessitating a reevaluation of global trade relationships. Several factors contribute to the rise of friendshoring:
- A growing recognition that traditional free trade has not delivered the promised benefits to all parties involved, leading to unprecedented unrest and societal change worldwide.
- A desire to avoid over-reliance on strategic rivals or outright adversaries, as seen in the recent weaponization of the US dollar-dominated SWIFT payment system.
- The increasing debt load worldwide, raising doubts about the long-term sustainability of current trade arrangements.
- The shifting landscape of geopolitical alliances, as countries like China and Russia actively seek alternatives to the US dollar as the global reserve currency.
As friendshoring gains traction there are some potential consequences and trends we should be aware of:
- Governments will increasingly erect barriers that add friction to trade flows and markets, requiring businesses to navigate a more complex regulatory environment.
- Costs will rise for both businesses and consumers, as the pursuit of shared values and interests replaces the single-minded focus on economic efficiency.
- Businesses must stay aware of geopolitics and build redundancies into their supply chains to mitigate the risks posed by sudden government actions such as tariffs or export restrictions.
- It’s possible that the US may neglect the interests of its allies above its own and erode its influence abroad.
- It’s possible that resulting global supply chains will be more brittle and subject to disruptions.
Friendshoring represents a significant departure from the traditional paradigms of offshoring, nearshoring, and reshoring, reflecting a fundamental shift in how countries approach trade and geopolitics. By prioritizing shared values and strategic interests, friendshoring seeks to create a more stable and resilient global trade environment. However, this shift comes with its own set of challenges, requiring businesses and governments to adapt their strategies and prepare for a new era of trade dynamics.
