What you need to know about friendshoring

In this series, we bust the jargon and explain a popular investing term or theme. Here it’s friendshoring.

This sounds like a dating app…

Friendshoring does sound like an app for seaside dates. The reality is less romantic, however.

The UK, the US and other governments are prioritising trade security, in a shift that began with Covid but has accelerated as a result of subsequent geopolitical events.

Countries want companies to diversify or reshape their supply chains, moving production away from states that are enemies – or allied with enemies – to friendlier nations.

The challenges are obviously immense, but America has already been shifting production away from China, emphasising the supply of the semiconductors crucial for cars, domestic appliances and electronic gadgets such as phones and laptops.

Is this the same as onshoring or nearshoring?

Not quite.

‘Onshoring’ involves moving production that has been offshored to China, say, to your own country.

‘Nearshoring’ means a switch from offshoring to a neighbouring or nearby country. Friendshoring, on the other hand, can involve greater distances.

Who first used this word?

US Treasury Secretary Janet Yellen first alluded to friendshoring in a speech made after Russia’s invasion of Ukraine in February 2022. The term was soon being heard in boardrooms in the US and elsewhere.

What might be the wider impact?

Whatever name you choose, the spotlight is turning to where a company produces its goods as a result of not only Ukraine, but also the trade war between the US and China, conflict in Gaza and now the Houthi attacks on vessels in the Red Sea which handles 12 per cent of world trade.

What could be the implications for companies’ profits?

Since friendshoring is only just beginning, the full impact is not entirely clear. The focus on proximity rather than cost, will increase overheads. But the sharp rise in the share price of defence giant BAE since the start of war in Ukraine illustrates the upside of putting security first.

Which countries could receive a boost?

Mexico has become the largest trade partner to the US, displacing China. This is thanks to friendshoring in some sectors. India, Latin America and Vietnam should be other major beneficiaries.

Are there wider issues at play?

Yes. Financial giant Schroders views friendshoring as part of the ‘disruption to the era of globalisation that began in the early 1990s’. Under globalisation, efficiency and cost were prioritised. Today, in what shadow chancellor Rachel Reeves has dubbed the new ‘securonomics’ era, the focus is shifting to resilience and reliability. This process is being called ‘de-globalisation’, ‘slowbalisation’, even ‘re-globalisation’.

Could it all end badly?

The fear is that the world could 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 make supply chains more robust and make businesses more efficient and profitable.