Why friendshoring isn't the answer and how India can build manufacturing prowess

This is misleading, as most analysts in the US, the country where the experiment of friendshoring originated, are also pointing out. The term friendshoring was coined last year by US treasury secretary Janet Yellen, a former US Fed Chair and one of the world’s most highly regarded economists. Friendshoring is an experiment through which the US hopes to favour its political allies when building new supply chains and refashioning existing ones to exclude China from the supply chains. China’s over-the-top response to the pandemic, its zero-covid policies, and Europe’s reliance on Russian gas have exposed the risks of being overly dependent on single sources for critical inputs. This has given new urgency to geoeconomic goals of reducing over-reliance and proactively deepening economic integration with trusted trading partners. On a visit late last year to Delhi, Yellen said that India is one such partner that the US would like to bolster ties.

It’s true that the Biden administration wants to reduce US economic dependence on China and tame Beijing’s increasingly aggressive geopolitical ambitions and assertiveness. It also wants to make sure that the US, not China, will control the technologies of the future. Friendshoring complements its other policies aimed at weakening US-China trade ties. The US has traditionally relied on export controls to keep China technologically a generation or so behind, although without hurting American companies’ earnings from low-cost manufacturing there. For this, the Biden Administration has not only retained the tariffs and quotas put in place during the Trump Presidency along with ‘Buy America’ type rules requiring manufacturers to use American iron and steel, for instance, but also has barred US companies from exporting semiconductor chips and critical manufacturing tools for making high-grade chips to China.

The US is spending billions of dollars in subsidies and tax credits to encourage the setting up of domestic chip fabrication plants. As part of friendshoring, the US is putting in place policies that favour battery minerals processed in countries with which it already has preferential trade deals. The Biden Administration’s Inflation Reduction Act (IRA) promises tax credits to electric vehicles assembled in North America, thus, extending the benefit also to Mexican and Canadian automakers.

What’s the problem with friendshoring, then? One, companies know all too well that there are never permanent friends. Apple, the company that has become a symbol of why friendshoring is a pipe dream, is looking to increase its manufacturing in ‘friendly’ countries like India and Vietnam, reducing its over-dependence on China. Even if it were possible to replicate in a different country the painstakingly intricate ecosystem China has created for Apple to make its products at the lowest possible costs, the MacBook maker knows all too well that, after all, Vietnam wasn’t a friend of the US just a few decades ago.

Second, even if it can be assumed that China will always remain enemy number one, to expect that businesses can be run on geopolitics rather than commercial considerations is to want something that defies economic logic. It is, therefore, not surprising that amid all the clamour for Apple to move production out of China, Apple has instead gone ahead and signed up with Luxshshare Precision, a competitor to Foxconn (hit by Covid zero) and Taiwan’s Pegatron, for the latest iPhone production, tightening its relationship with China. The ecosystem China has built specifically for Apple based on demands raised by the company cannot be replicated in Vietnam or India. At least not in a hurry.

Therefore, for all the noises being made about the rise of a new global order in which geopolitics will dictate supply chains, it is difficult to imagine any significant realignments beyond minor adjustments that make commercial sense and reduce the risk of zero-covid type disruptive policies to corporate profits.

Building strategic self-reliance, what India calls Atmanirbharta, and alliances, or friendshoring, should ideally mean balancing the gains and costs of doing so. Which government — how long can even the US go on spending billions on subsidies and tax credits — in today’s world of precariously high public debt levels is in a position to compensate companies for staying away from the cheapest sources of inputs and technology and falling in line with choices dictated by geopolitical calculations? No company will absorb the considerable costs of giving up the advantages manufacturing in China offers. If companies are forced to do this, either taxpayers will have to foot the bill for the loss of those advantages, or companies will charge consumers for the higher costs by marking up retail prices. Can the exchequer afford the fiscal costs of the subsidies that this demands?

Instead of hitching hopes to friendshoring, the focus should be on identifying and removing the sources of high costs and the policy errors that render Indian manufacturing less competitive than other countries. That alone is the surest way of building manufacturing prowess, attracting global manufacturing to set up factories here.