Moving Your Manufacturing out of China: Choose a “Friend”

The U.S. Treasury Secretary Suggests You “Friend-Shore” Your Supply Chain

Regular readers of this blog know that we have been strong advocates for “de-risking” supply chains, especially when they are overweighted with China manufacturing. We always note that we understand some companies cannot easily shift manufacturing and operations out of China, but those that can, should.

Rather than bore you with further admonitions about de-risking your supply chain, I’m going to pass the mic to U.S. Secretary of the Treasury (and former Chair of the U.S. Federal Reserve) Janet Yellen, who earlier this week spoke to an audience at the Atlantic Council, a Washington, D.C.-headquartered think tank.

The transcript of Yellen’s remarks is here, if you’re interested, but I’ve pulled out a few highlights. As U.S. Treasury Secretary, Yellen’s mandate includes promoting a stable U.S. economy, protecting the integrity of the U.S. financial system, and strengthening U.S. national security. Understandably, a significant portion of her talk and the subsequent question and answer session was focused on Russia and China (as a supporter of Russia).

Yellen said (my highlights):

The war in Ukraine and sanctions against Russia highlight the pivotal role of China. China has long claimed to hold sacrosanct key international principles—including those enshrined in the U.N. Charter with respect to sovereignty and territorial integrity. Whatever China’s geopolitical aims and strategies, we see no benign interpretation of Russia’s invasion, nor of its consequences for the international order. China cannot expect the global community to respect its appeals to the principles of sovereignty and territorial integrity in the future if does not respect these principles now when it counts … Going forward, it will be increasingly difficult to separate economic issues from broader considerations of national interest, including national security. The world’s attitude towards China and its willingness to embrace further economic integration may well be affected by China’s reaction to our call for resolute action on Russia.

Yellen then went on to outline the U.S. Treasury’s (and by extension, U.S. government’s) strategy for promoting international cooperation as the primary tool for building strong economic foundations that benefit not only developed nations, but also – and in many ways more importantly – developing nations, where increases in the prices of energy, food, fertilizer, and other commodities can impose tremendous hardship. She noted that the economic effects of Russia’s invasion of Ukraine will be felt globally, and come hard on the heels of a pandemic that has affected every person and business on earth, and still continues to badly disrupt supply chains.

Her strategy for moving forward includes the following:

First, we need to modernize the multilateral approach we have used to build trade integration. Our objective should be to achieve free but secure trade. We cannot allow countries to use their market position in key raw materials, technologies, or products to have the power to disrupt our economy or exercise unwanted geopolitical leverage. So let’s build on and deepen economic integration and the efficiencies it brings on terms that work better for American workers. And let’s do it with the countries we know we can count on.

Favoring the friend-shoring of supply chains to a large number of trusted countries, so we can continue to securely extend market access, will lower the risks to our economy as well as to our trusted trade partners. We should also consider building a network of plurilateral trade arrangements to incorporate elements of the modern economy that are growing in economic importance, especially digital services. We should harmonize our approaches to protecting the privacy of data. And a modernized trade system will also require the ability to effectively enforce trade policies and practices, both multilateral and bilateral.

What does Secretary Yellen mean by “friend-shoring”?

As an example, last November President Joe Biden welcomed President Andrés Manuel López Obrador of Mexico and Prime Justin Minister Trudeau of Canada to the White House for the first North American Leaders’ Summit since 2016. The summit followed a U.S.-Mexico High-Level Economic Dialogue in September, and virtual and real-world meetings earlier in 2021 with Canadian and Mexican leaders by U.S. Secretary of State Antony Blinken and U.S. Vice President Kamala Harris.

We reported on the summit here, saying, “It’s clear that President Biden and his administration are prioritizing the resuscitation of bilateral relationships with U.S. neighbors and to the broader Northern American relationship.”

We added, “For North American businesspeople, this is nothing but good news. At the High-Level Economic Dialogue, the U.S. and Mexico launched a bilateral supply chain working group, the first for both nations. This month’s Leaders’ Summit yielded plans to establish a North American supply chain working group that will aim to define essential industries in order to minimize future disruptions, including in areas such as critical minerals.”

President López Obrador was the most plain-spoken at the November summit, but it is clear that Secretary Yellen’s remarks this week continue the administration’s commitment to rebuilding U.S. diplomatic and trade relationships to benefit U.S. businesses (and what benefits U.S. businesses mostly benefits global markets, and certainly benefits non-U.S. businesses that operate in the U.S.).

Is the world splitting into two camps?

After she delivered her prepared remarks, Secretary Yellen was asked a few questions by Atlantic Council officials and members of the audience. One questioner asked if Secretary Yellen sees “a bipolar system as the new reality in which the US and its allies are in one camp and maybe China and others are in another camp?”

Yellen replied:

Well, I really hope that we don’t end up with a bipolar system. And I think we need to work very hard and to work with China to try to avert such an outcome. I think to me the big picture is that China has benefited enormously from being part of a global system, a rules-based multilateral system. And this has really promoted China’s economic growth. And we ought to try to preserve the best features of that system. I believe it’s also been beneficial to the United States and our allies.

But real problems have emerged, and we need to work with China to address those problems. China relies in many ways on state-owned enterprises and engages in practices that I think unfairly damage our national-security interests. And I think we’ve all recognized, in the aftermath of the pandemic, that our supply chains, while having become very efficient and excellent at reducing business costs, have not been resilient. And we need to address that as well.

Yellen went on to recommend supply chain diversification, which she called “friend-shoring”. This means, she explained, that, “… rather than being highly reliant on countries where we have geopolitical tensions and can’t count on ongoing, reliable supplies, we need to really diversify our group of suppliers. And yes, friend-shoring means—and you’ve seen this in action—that we have a group of countries that have strong adherence to a set of norms and values about how to operate in the global economy and about how to run the global economic system, and we need to deepen our ties with those partners and to work together to make sure that we can supply our needs of critical materials.”

Regular readers of this blog also know we are fond of noting that China’s Communist Party – like many political organizations –acts almost exclusively in its own interest. As a result, it is unlikely to take to heart Secretary Yellen’s suggestions for promoting multilateral trade cooperation: “I think China needs to take seriously working with us, and it’s not just the United States. Europe and other countries share concerns about some of the practices that China has that negatively impact our national security, human rights concerns. I would like to see us preserve the benefits of deep economic integration with China, not going to a bipolar world, but clearly that’s a danger that we need to address.”

If – unlike the Communist Party of China – you are inclined to give some consideration to Secretary Yellen’s advice, in a post we published earlier this week we outlined a handful of steps we are advising our clients to take (depending, of course, on their specific circumstances).