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In this series, we break down the jargon and explain a popular investing term or topic. Here is friendship.
This sounds like a dating app…
Friendshoring sounds like a seaside dating app. However, the reality is less romantic.
The UK, US and other governments are prioritizing trade security, in a shift that began with Covid but has accelerated as a result of subsequent geopolitical developments.
Countries want companies to diversify or reshape their supply chains, moving production from enemy states – or allies of enemies – to friendlier nations.
The challenges are obviously immense, but the United States has already been moving production out of China, emphasizing the supply of crucial semiconductors for cars, appliances and electronics such as phones and laptops.
Is it the same as onshoring or nearshoring?
New vocabulary: US Treasury Secretary Janet Yellen first alluded to friendship in a speech after the Russian invasion of Ukraine in February 2022.
‘Onshoring’ involves moving production that has been offshored to China, for example, to your own country.
‘Nearshoring’ means an offshoring change to a neighboring or nearby country. Friendship, on the other hand, can involve greater distances.
Who used this word for the first time?
U.S. Treasury Secretary Janet Yellen first alluded to friendship in a speech after Russia’s invasion of Ukraine in February 2022. The term was soon heard in boardrooms across the United States and elsewhere. .
What could be the broader impact?
Whatever name you choose, the focus is on where a company produces its products as a result not only of Ukraine, but also the US-China trade war, the conflict in Gaza and now the attacks by the Houthis to ships in the Red Sea that handles 12 percent of world trade.
What could be the implications for companies’ profits?
Since friendshoring is just beginning, the full impact is not entirely clear. Focusing on proximity rather than cost will increase overhead. But the sharp rise in defense giant BAE’s share price since the start of the war in Ukraine illustrates the benefits of putting security first.
Which countries could get a boost?
Mexico has become the United States’ largest trading partner, displacing China. This is due to friendship in some sectors. India, Latin America and Vietnam should be other big beneficiaries.
Are there broader issues at play?
Yes. Financial giant Schroders sees friendshoring as part of “disrupting the era of globalization that began in the early 1990s.” Under globalization, efficiency and cost were prioritized. Today, in what shadow chancellor Rachel Reeves has called the new era of ‘securonomics’, the focus is shifting to resilience and reliability. This process is called “deglobalization”, “deceleration” and even “reglobalization”.
Could it all end badly?
The fear is that the world will be poorer, less productive and divided between free market democracies and countries that align with the authoritarian regimes of China or Russia. However, friendshoring could strengthen supply chains and make companies more efficient and profitable.