Skip to main content
rob magazine
Open this photo in gallery:

Nada Hayek/The Globe and Mail

During a much-watched speech in Washington this past October, Finance Minister Chrystia Freeland touted a new post-globalist way of thinking about trade. “Democracies must make a conscious effort to build our supply chains through each other’s economies,” she said.

She talked a lot about her government’s twinned foreign policy preoccupations—the war in Ukraine and China’s “increasingly aggressive wolf diplomacy”—and worked in a shout-out to U.S. Treasury Secretary Janet Yellen, who is credited with coining a buzzy term for this desired shift in global trade relations: friend-shoring.

The idea, which has its critics, is that Western governments can use various carrots and sticks to encourage key industries to source their materials primarily from political allies, rather than rely on market economics to determine global supply chains.

Is Yellen’s embrace of friend-shoring to “trusted countries” anything more than an updated term for trade protectionism? After all, it includes not just the usual cudgels, like tariffs and made-in-America procurement rules, but also financial inducements to boost domestic manufacturing in strategically vital sectors, like semiconductors.

Yellen and Freeland also want to establish free-trade zones so companies will avoid sourcing goods, energy or parts from hostile rivals. The European Union, whose dependence on Russian natural gas became problematic over the past year, is taking similar measures.

As Washington tries to entice tech-industry suppliers to shift production out of China, Ottawa is taking steps to ensure Canada remains a major customer for U.S. firms. For example, the federal Liberals are enacting stricter controls on Canadian mines that produce minerals like copper, cobalt and lithium that go into electric vehicle batteries so they’re used in North American factories instead of Chinese ones.

Freeland and Foreign Minister Mélanie Joly are also promoting new foreign-policy frameworks, such as the Indo-Pacific Strategy, which cites supply-chain “resilience” as a key target for countering China’s muscle-flexing. The strategy calls for more investment in domestic transportation infrastructure and positioning Canada as a reliable supplier of clean energy, hydrogen and critical minerals for allies like Japan, Australia, India and Taiwan.

Friend-shoring, of course, is also a response to the supply-chain chaos inflicted by COVID-19, raging inflation, labour shortages, marooned cargo ships and, more generally, a globalized trading system that’s become too brittle for its own good. Indeed, some observers are talking about replacing the 30-year-old “just-in-time” approach to managing supply chains with a more prudent “just-in-case” philosophy.

While “shoring” is often used as a trade-related suffix—think re-shoring or near-shoring—friend-shoring may have a different objective. “To me, friend-shoring has a geopolitical agenda behind it,” says Candice Chow, who teaches strategic management at McMaster’s DeGroote School of Business. She argues that friend-shoring can be a pragmatic response to instability. Others are less persuaded.

“It sounds like a good idea. But I don’t think it’s practical,” says Walid Hejazi, professor of economic analysis and policy at the University of Toronto’s Rotman School of Management. He notes that over the past three decades, much of the world’s manufacturing capacity has migrated to countries with low labour costs, and he doubts the trade toothpaste can be put back in the tube. “I don’t think most consumers will pay the premium,” says Hejazi. “Unless the government says, ‘Look, you can’t trade with China, you can’t trade with Russia, you can’t cheap-trade with other bad players in the world,’ then I’m not sure how this would be implementable.”

Governments are betting otherwise, providing incentives for companies to shift their supply-chain networks into friendlier jurisdictions. In November, for example, Washington unveiled a US$39-billion fund aimed at expanding U.S. semiconductor manufacturing, including R&D. The U.S. is also adjusting its trade tariffs to shift production of commodities like steel from China to friendlier shores, like Japan.

Some Canadian business groups are all in on this proposed shift toward a more regional approach that draws new manufacturing into North America. But they also caution that Canada has to lean in to this project, especially given the huge sums that will be spent in the U.S. “We can’t be complacent,” says Dennis Darby, president and CEO of Canadian Manufacturers & Exporters. “I’ve never seen a transition like this. Every company is trying to figure out where the puck is going.”

The problem is that global supply chains have developed over several decades, and can’t be uprooted and moved overnight.

“There are so many factors to consider,” says DeGroote’s associate dean, Elkafi Hassini, who chairs the Smart Freight Centre, a Greater Toronto and Hamilton Area logistics research group. He uses 12 supply-chain metrics—including labour markets, transportation routes, and risks like environmental disasters and war—to evaluate optimally configured supply chains and the locations of suppliers. Political instability doesn’t even make his top five; it ranks seventh.

In any event, Hassini doesn’t think the West’s preoccupation with friend-shoring will do much to alter the networks that have built up since the early 1990s, when the World Trade Organization and General Agreement on Tariffs and Trade dictated the terms of post–Cold War globalism. Darby agrees: “We have relied on China and Southeast Asia manufacturing [for decades],” he says. “They’re not going anywhere. You don’t suddenly stop.”

Yet, it’s hard to deny that times have changed, and it’s possible to look at friend-shoring as a manifestation of something much bigger: a heightened awareness of risk in an increasingly risky world. Some of that risk clearly comes from geopolitics, but it’s also about unruly forces such as climate, the pandemic and other disruptive trends.

Hassini points to the U.S. government’s efforts to accelerate domestic vaccine development early in the pandemic—a move that responded, in part, to the risks baked into global pharmaceutical supply chains (e.g., over-exposure to a handful of overseas suppliers). He argues there’s merit to taking geopolitical risk factors into account alongside traditional financial considerations.

Latent risk, moreover, is also top-of-mind for ESG-oriented investors who want to know how companies plan for imponderables like pandemics and tsunamis. The international property-insurance industry has learned that lesson the hard way and is now a high-profile advocate for ensuring the “G” in ESG includes eyes-wide-open risk mitigation at a time when climate change can lay waste to disaster-prone cities and low-lying regions. In the world of supply chains, that outlook means ensuring there’s enough just-in-case redundancy to provide a buffer if, for instance, a major port shuts down because of COVID restrictions.

Hejazi also points to the 2013 collapse of a garment factory in Bangladesh, which killed more than 1,100 workers, and revealed how brands like Joe Fresh were participants in what turned out to be a deadly supplier arrangement. Freeland’s friend-shoring campaign isn’t really about countries like Bangladesh, which pose no geopolitical threat. But the Rana Plaza tragedy, and other human rights abuses in the garment industry, do offer lessons about the downside of caring only about cost.

Whether already tense relations among the world’s three superpowers will be stoked by friend-shoring remains to be seen. As Hejazi points out, countries have traded with their enemies before and will do so again. Still, governments should have a clear goal with friend-shoring so they aren’t just pulling up the proverbial drawbridge, says Chow. Her advice to Freeland: “Friend-shoring is a means to some kind of end. What outcomes do we want from a supply-chain resilience perspective? She needs to say what the outcomes should be.”

Editor’s note: An earlier version of this article incorrectly noted that Canadian Tire Corp. was associated with Rana Plaza. Canadian Tire has no direct suppliers associated with the Rana Plaza factory, nor does it directly manufacture there. This version has been corrected.

Open this photo in gallery:

Your time is valuable. Have the Top Business Headlines newsletter conveniently delivered to your inbox in the morning or evening. Sign up today.

Follow related authors and topics

Authors and topics you follow will be added to your personal news feed in Following.

Interact with The Globe