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Just Say No to “Friend-Shoring”

Following major shocks to global supply chains in recent years, it is not surprising that governments are groping for new policies to build more resilience and ensure a continuous supply of critical inputs. But abandoning free and fair trade is not the answer.

CHICAGO – In an important speech to the Atlantic Council in April, US Secretary of the Treasury Janet Yellen issued a welcome call for revitalizing the world economic order. But she also generated headlines with a single sentence advocating what she called “friend-shoring”: that is, limiting the trade of key inputs to trusted countries in order to reduce risks to the supply chains on which the United States and its partners rely.

This should worry us. Today’s global supply chains – made possible by reductions in tariffs and lower transportation and communication costs – have transformed production by allowing firms to manufacture goods wherever it is cheapest to do so. This has generally meant that while high-value-added inputs (such as research and development, design, advertising, and finance) are sourced in advanced economies, manufacturing moves to emerging markets and developing countries.

The benefits are obvious. Final products are significantly less expensive, so even the poorest people in rich countries can buy them.