Brussels In April, India’s Prime Minister Narendra Modi received two important visitors from Europe in quick succession. First British Prime Minister Boris Johnson arrived and campaigned for closer economic cooperation. Then the President of the EU Commission, Ursula von der Leyen, came to Delhi and announced a “strategic partnership”.
The attack on Ukraine and the Taiwan conflict have recently significantly increased the motivation for friendly action. But this strategy also has downsides and can lead to high costs for consumers and companies.
In practical terms, it is about shifting your own supply chains to friendly countries and thus securing access to important raw materials and other products. “Secure trade” is taking the place of free trade,” writes Günther Maihold in an analysis by the Berlin Science and Politics Foundation. In this new world, suppliers would be checked for trustworthiness and reliability.
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Europe’s heads of government and business leaders were already startled during the corona pandemic when container deliveries from China faltered. A gas emergency is now looming because Russia wants to punish the West for supporting Ukraine. There is also cause for concern that China controls global lithium production – and thus the most important raw material for the key e-mobility industry. As a result, there are now increasing calls for supply chains to become more resilient.
The term “friendshoring” was coined by US Treasury Secretary Janet Yellen. Speaking to the Atlantic Council in April, she said, “We cannot allow countries to have the power to disrupt our economies because of their market position in critical commodities, technologies or products.” She suggested turning supply chains towards countries focus on “we can count on”. In this way, the risks for the American economy can be reduced.
The EU is pursuing a similar strategy. The geopolitical situation is changing the perspective on trade policy, EU Commission Vice President Valdis Dombrovskis recently told the Financial Times. The Commission is therefore striving for more trade agreements with “like-minded” partners.
The agreement with Chile is to be renegotiated by the end of the year, followed by a deal with Australia in the first half of 2023. Both countries have large deposits of raw materials and are stable democracies. It is about strengthening the resilience of the European supply chains, explained Dombrovskis.
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The Minerals Security Partnership, in which five European countries as well as Japan, South Korea and Australia are involved in addition to the USA and Canada, goes in the same direction. The aim is to create continuous supply chains for cobalt, lithium and nickel – from mining to recycling. The EU is now even planning a joint “Council for Technology and Trade” with China’s rival India. Such a body usually only exists between the EU and the USA.
Anna Cavazzini, Chair of the Internal Market Committee in the European Parliament, welcomes the EU initiatives as “small, important steps to make supply chains more secure.” However, the Green politician warns against relying entirely on “friendshoring”. The solution cannot be to frantically sign new trade deals with friends while ignoring EU standards on sustainability and human rights, she says. “You still have to follow the rules.”
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Critics consider “friendshoring” to be a mistake. Economists warn of a new Cold War undermining free trade and driving up costs for businesses and consumers. “I understand the national interest in certain critical raw materials and that you don’t want to be dependent on them,” says Johannes Fritz of the Swiss think tank Global Trade Alert. “General diversification is necessary. The question is whether you should fall into friend-foe thinking.”
If the West breaks off trade relations because other countries don’t share its own values, the circle of potential suppliers is reduced, says Fritz. “But you achieve resilience if you have as many sources as possible.”
Who is considered a friend?
The economist Helena Schweiger from the European Bank for Reconstruction and Development is also skeptical about the debate: “From an economic point of view, friendshoring doesn’t make sense because it reduces the economic growth of everyone involved.” Keeping world trade as open as possible is better than new restrictions.
Former central banker and economist Raghuram G. Rajan warned in an article for “Project Syndicate” that friendshoring amounts to trading only with countries at a similar level of development. The advantage of global supply chains, however, consists precisely in the different income levels, so that each country can play to its comparative advantage.
BDI and DIHK are calling for new trade agreements
The problem of friendshoring starts with the definition: Who counts as a friend? Just flawless democrats? Or are some autocrats acceptable after all? In reality, the concept quickly reaches its limits: the Europeans are now ordering liquefied gas in Qatar to replace the Russian gas. So you just swapped one autocracy for another. And courted India may be the world’s largest democracy. But Prime Minister Modi is avoiding a clear demarcation from the Russian warmonger Vladimir Putin.
The Federation of German Industries (BDI) advocates a somewhat broader definition of “friends”. “Trading partners do not necessarily have to be liberal democracies,” says Wolfgang Niedermark from the BDI general management. “One should differentiate between reliable business and investment partners and insecure countries.” In the autocracies, the default risk is greater. German companies are increasingly willing to pay a premium to compensate for such difficulties.
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China seems to continue to be a reliable partner for many companies, at least economists have not yet identified any major emigration movements. There is no sign of a move away from China in the trade data, says Schweiger. “Governments talk about friendshoring, but we always have to remember that trading takes place at the corporate level. And not much seems to be happening there yet.”
The boss of the chemical giant BASF, Martin Brudermüller, recently provided an important argument for the unchanged commitment of many companies to China: China is the fastest growing chemical market and will account for half of the world market by 2030, he explained. “It’s difficult to say that you’re not taking part.” In addition to the huge sales market, China often also offers the most favorable production conditions.
In order to overturn the rules of economic gravity, the EU would have to come up with something. Business associations are pushing for new free trade agreements. “If we focus more on alternatives to China, the EU must take market opening with other regions more seriously and urgently conclude new trade agreements,” says Niedermark. “We have to break down the trade barriers, especially with our allies.”
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Ilja Nothnagel from the Association of German Chambers of Industry and Commerce (DIHK) is also calling for a fresh start in the faltering free trade talks. “Rapid ratification of the EU-Canada agreement (Ceta) would be an important signal for open markets and rules-based trade with important partners,” he says. “The federal government should also work for the swift conclusion of the EU agreements with Mercosur, Indonesia and India. A stronger focus by the EU on a close institutional link between the neighborhood and the internal market is also necessary.”
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