Friendshoring vs. Onshoring

Commentary by William Alan Reinsch

Published September 16, 2024

Last week I had the opportunity to attend the U.S. Department of Commerce's Supply Chain Summit. It was an impressive event that featured the rollout of the department's new analytical tool, SCALE, to help companies assess supply chain risk. It sounds like it will be a useful aid to companies, and those of you who are interested should check it out on the department's website. There has been a lot of talk over the past three years about supply chain security and resilience and a lot of commitments to cooperate. The Department of Commerce is now giving all those words some meaning, which is a welcome development.

Less reassuring, however, was a panel discussion on U.S. government efforts to build more resilient supply chains. The panelists were two departmental deputy secretaries and two representatives from the U.S. National Security Council. The latter made some comments about the Biden administration's policy that were both revealing and depressing.

In discussing how the government is promoting supply chain resilience, they cited two particularly interesting examples. The first involved cranes-the ones used to load and unload ships, not the birds in your local swamp-where the panelists were pleased that the U.S. government had persuaded a Japanese company to make them in the United States, thus allowing the United States to phase out any dependence on Chinese cranes. The second example involved icebreakers. The United States no longer makes them-indeed our entire shipbuilding sector is in serious decline-and the government has been talking to both Finland and Canada, who do make them, about investing in production in the United States.

There are two problems with these examples, one small and one large. Let's take the small one first, which is semantic. These were presented as examples of friendshoring, which to my mind is simply incorrect. Friendshoring means integrating production in other countries-friends-into U.S. supply chains in order to reduce reliance on Chinese parts and components. Friendshoring does not mean persuading foreign companies to locate in the United States. That is onshoring, or reshoring if they are returning. The Scholl Chair has researched this issue in the past related to the pharmaceutical sector, and we recommended a "trusted partner" model that would enable companies to enter into relationships with partners in trusted countries where they could have confidence in the security of their supply chains.

This confusion of terms may explain an anomaly I have noticed. The Biden administration talks often about supply chain security and mentions both onshoring and friendshoring in the process. I have always thought the latter reference was just lip service-that the administration talks about friends but is really only interested in bringing manufacturing back onshore. Perhaps, instead, members of the administration think that both terms mean the same thing. For the record, friendshoring and onshoring are not the same, and at the very least the administration should get the words right.

The second, and larger, problem is with the policy itself. Ironically, the icebreaker example was prefaced with a comment about comparative advantage. It is nice to see that policymakers have not completely forgotten about David Ricardo, but it would be even nicer if they actually understood his theory. Like many things in economics, Ricardo's comparative advantage theory is complicated, but the essence of it is that countries should concentrate on the areas where they are most competitive and trade for products where they are less competitive. The United States does not make icebreakers, which pretty clearly means we are not competitive in them, and it would be expensive to try to rebuild that capability. Finland and Canada do make them-no surprise given their northern locations-and one would think that the most sensible thing for the United States to do, and the thing most consistent with comparative advantage, would be to buy icebreakers from those two countries rather than trying to build an industry from scratch.

It is a fair point that the world has changed in the 200 years since Ricardo propounded his theory. The most relevant development is the realization that while Ricardo's theory was based on relatively fixed factors of production, countries over the past 50 years have realized that they can create comparative advantage through a combination of subsidies, protection, and other market-distorting actions. China is an excellent example of that. Finland and Canada are not. While no country is entirely innocent when it comes to market distortions, those two are at the opposite end of the free market spectrum from China. They are also reliable NATO allies and friends, and relying on them for critical items poses no risks.

And what is the lesson from this small episode? For me, it is that regardless of what the administration says about resilience and friendshoring, the real policy objective is onshoring-bringing manufacturing, usually heavy manufacturing, back to the United States. I have discussed that in past columns, notably "Trying to restore "old" manufacturing ignores the evolution of the U.S. economy toward services and the lack of workers willing and able to take on new blue-collar jobs. The administration deserves credit for its efforts to promote "new" industries in the tech sector, but pretending that onshoring is really friendshoring misses opportunities to build balanced partnerships with our allies and is a misguided effort to take our economy back 70 years. When the vice president and presidential candidate Kamala Harris says, "We're not going back," I hope that includes her economic and trade policies.

William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C.

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