Janet Yellen pitches more friendshoring opportunities for India: What it means
Friendshoring is a concept to implement regulations encouraging businesses to spread manufacturing within a group of nations with shared values. The intention is to stop less like-minded nations from unfairly using their market dominance in essential raw resources, technologies, or goods to undermine the US economy or its allies' economies.
The United States is pursuing an approach called "friendshoring" to diversify away from countries with geopolitical and security risks to the supply chain. On Friday, US Treasury Secretary Janet Yellen, who is visiting India, said that friendshoring is not an exclusive club and the US is proactively deepening economic integration with trusted trading partners like India.
Over the past few years, trade disruptions have escalated globally due to the economic crisis, the Covid-19 pandemic, and the US-China trade war. The year 2022 has been the most impacted as COVID- 19 shook the world's supply chains. The Russia-Ukraine war that began in February 2022 took the crisis further. Critical supply networks have yet to fully recover from labour shortages, manufacturing closures, and other pandemic-related disruptions.
Time and again, the US has asked India to align with them against Russia, primarily with respect to transitioning away from buying oil from Russia. India imports 85 percent of its crude needs and has emerged as Russia's second-largest oil customer after China, taking advantage of discounted Russian oil shunned by some Western buyers.
On Tuesday, India's Foreign minister S Jaishankar backed India's increasing oil imports from Russia. He said that energy ties with Moscow have worked to India's advantage and that it's in India's interest to keep the imports going.
Ahead of the visit to India, Yellen has said that India stands to gain from a price cap on Russian oil and the United States hopes it will take advantage of it, as the news agency PTI reported.
Yellen's focus on friendshoring seems like a way to offer India an economic incentive to wean the world's largest democracy off the Russian influence.
What is friendshoring?
"For too long, countries around the world have been overly dependent on risky countries or a single source for critical inputs," Yellen said today in her speech. In April, the US Treasury Secretary suggested friendshoring to protect international supply networks against interruption or economic pressure from outside sources.
The concept is to implement regulations encouraging businesses to spread manufacturing within a group of nations with shared values.
The intention is to stop less like-minded nations from unfairly using their market dominance in essential raw resources, technologies, or goods to undermine the US economy or its allies' economies.
What are some examples of friendshoring?
Yellen also said in her speech today that the progress of friendshoring is already visible, with Western companies diversifying supply chains and investing beyond China.
With the cooperation of countries that share the same ideology, the US seeks to minimise its reliance on autocratic governments for critical resources like rare earth, magnets, and other items that can be utilised for military purposes. Additionally, the effort would look to diversify away from Russian producers of vital commodities, notably energy, food, and fertiliser.
Sectors under importance with friendshoring are the semiconductor industry, green energy, telecommunications and the mineral industries. In all these sectors in recent months, the US has been trying to shift the dominance from Russia and China to other countries, primarily Asian countries.
For instance, the US heavily depends on Taiwan for semiconductors, and a potential Chinese invasion of Taiwan can trigger a shortage. So the Biden government has not only formed bilateral cooperation ties with South Korea for semiconductors, but on October 21, 2022, it also implemented a slew of strict controls on exporting American chip technology to China.
Yellen on Friday also mentioned plans by the US company First Solar Inc. to develop a manufacturing facility in southern India and Apple Inc.'s ambitions to move some iPhone production from China to India.
What are some arguments against friendshoring?
While friendshoring does sound like a means to distribute power in the world amongst nations with like-minded ideas, it can also be a way for covering up things, as pointed out by the former governor of the Reserve Bank of India, Raghuram Rajan, in an article in Project Syndicate.
He highlights that it is justifiable for a country to ensure that goods and services essential to its national defence are produced domestically or by friendly neighbours. "The problem is that "essential" is often broadened by protectionist interests to include even widely produced commodities like steel or aluminium," adds Rajan.
He mentions that in the future if friendshoring mandates are applied to a broader categorisation, it can harm international trade. According to him, friendshoring would often entail trading with nations with similar institutions and values; in reality, this will limit trade to countries with comparable levels of development.
Experts have also pointed out that one of the important things about the global supply chain is that it allows firms to manufacture goods wherever it is cheapest. Hence the final products become more affordable and consumers are benefited. With friendshoring, there can be a change in the dynamics of the global supply chain, restricting manufacturers and ultimately increasing costs for consumers.
This was also pointed out by Jaishankar when he was asked in Moscow about the Western pressure on India to limit trade ties with Russia as he said ``fundamental obligation'' is to ensure that the Indian consumer has the best possible access, on most advantageous terms, to international markets.
There is also a risk that poor countries needing global trade might be excluded from this friendshoring.
In her speech today Yellen said, “The US and India share an interest in strengthening our supply chains in a world where certain governments wield trade as a geopolitical weapon. The US will continue to deepen our business and commercial ties with India as we pursue our friendshoring agenda."
First Published: Nov 11, 2022 4:10 PM IST
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