What is Friend Shoring?
In recent years there has been no shortage of discussion around ‘shoring’ in trade. Terms like “near-shoring” or “far-shoring” almost speak for themselves, but the latest buzzword, “friend-shoring” take more explaining.
Both ‘near-shoring’ and ‘far-shoring’ are driven by the search for efficiency. As the names suggest, this can be achieved by trading with companies near or far from you.
Near-shoring is typically a close relocation or trading relationship with a nearby country, so US companies setting up in Mexico or using suppliers in Mexico would be a good example. Conversely, far-shoring involves trading over long distances, often continents and time zones, with the aim of finding cheaper products.
After the Covid pandemic there had been a shift towards near-shoring as companies seek to avoid supply chain shortages through shorter trading distances. But in recent times, geopolitical concerns may be shifting trade patterns in a new direction.
The emergence of Friend-Shoring
Friend-shoring has emerged as an alternative to trade relationships based on geographic distances. It involves trading between countries with similar geopolitical stances and is driven by growing polarisation around conflicts, such as Ukraine or the Middle East, and their related sanctions or political support. On top of that we have an ongoing trade war between the US and China that is expanding to supply chains in other countries and increased protectionism for critical minerals and strategic industries. For example, the US government has committed to obtain components and raw materials from ‘friendly’ countries with shared values to increase security of domestic production.
These difficult trading conditions are only likely to increase as governments or trading blocs seek to protect their interests and domestic firms. One example is the EU’s Carbon Border Adjustment Mechanism that is slowly being introduced this year. This seeks to protect European companies that have invested in sustainable technologies by increasing import tariffs on suppliers who may have cheaper products due to lower environmental standards.
How is Friend-Shoring impacting trade?
In technical terms, near-shoring is calculated as reverse of trade-weighted average distance in km, while friend-shoring is calculated as trade-weighted political proximity as measured by the United Nations voting patterns.
Recent trade data shows that since 2022, there has been a noticeable rise in the political proximity of trade since the latter part of 2022. This suggests a shift towards trading among countries with similar geopolitical stances (their ‘friends’). At the same time there has been an overall decrease in the diversification of trade partners, indicating a concentration of global trade within major trade relationships. (UNCTAD Global Trade Update – December 2023)
What does this mean for companies
For most companies, friend-shoring is a policy that is imposed upon them by outside forces such as political pressure or government regulation, rather than a purely business or cost decision. It can result in companies needing to shift supply chains and find new suppliers in countries where they have never done business – adding additional costs and uncertainty to supply chain management.
How Velociti can help
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