Why friendshoring is not the answer and how India can build manufacturing skills

This is misleading, as most analysts in the US, the country where the friendshoring experiment originated, are pointing out. The term friendshoring was coined last year by US Treasury Secretary Janet Yellen, former chair of the US Fed and one of the world’s most respected economists. Friendshoring is an experiment through which the US hopes to curry favor with its political allies while building new supply chains and reshaping existing ones to exclude China from supply chains. China’s over-the-top response to the pandemic, its zero-Covid policies, and Europe’s reliance on Russian gas have exposed the risks of relying heavily on single sources for critical inputs. This has given new urgency to the geo-economic goals of reducing interdependence and actively deepening economic integration with trusted trading partners. During a visit to Delhi late last year, Yellen had said India was a partner the US would like to strengthen ties with.

It is true that the Biden administration seeks to reduce US economic dependence on China and contain Beijing’s increasingly aggressive geopolitical ambitions and assertiveness. He also wants to ensure that the US, not China, controls the technologies of the future. Friendshoring complements its other policies aimed at undermining US-China trade relations. The US has traditionally relied on export controls to keep China technologically behind a generation or so, though without hurting the earnings of US companies from low-cost manufacturing. To this end, the Biden administration has not only maintained the tariffs and quotas imposed during the Trump presidency with ‘Buy America’-type rules requiring manufacturers to use American iron and steel, for example, Rather, American companies have also been barred from exporting semiconductors. Chips and key manufacturing equipment for making high grade chips for China.

The US is spending billions of dollars in subsidies and tax credits to encourage the setting up of domestic chip manufacturing plants. As part of friendshoring, the US is creating policies that favor battery minerals processed in countries with which it already has preferential trade deals. The Inflation Reduction Act (IRA) of the Biden administration promises tax credits for electric vehicles assembled in North America, thus, also providing benefits to Mexican and Canadian automakers.

Then what’s the problem with friendshoring? One, companies know very well that there are never permanent friends. Apple, which has become a symbol of why friendshoring is a pipe dream, is looking to increase its manufacturing in ‘friendly’ countries like India and Vietnam, thereby reducing its dependence on China. Even if it were possible to replicate in another country, given the painstakingly complex ecosystem China has created to make its products at the lowest possible cost, the MacBook maker is well aware that After all, Vietnam was not his friend. A few decades ago the US

Second, even if it can be assumed that China will always remain enemy number one, to expect that trade can be run on geopolitics rather than commercial considerations is to do something that defies economic logic. So, it should come as no surprise that amidst all the clamor for Apple to move production out of China, Apple has instead gone ahead and signed up with Luxshare Precision, which is based in Foxconn (Covid zero affected) and Taiwan. K is a competitor to Pegatron. iPhone production is strengthening its ties with China. The ecosystem that China has built specifically for Apple, based on the demands raised by the company, cannot be replicated in Vietnam or India. At least not soon.

So, for all the noise being made about the rise of a new global order in which geopolitics will dictate supply chains, it is hard to envision any significant restructuring beyond minor adjustments that make commercial sense and zero- Reduces the risk of Covid type disruptive policies. for corporate profits.

Building strategic self-reliance, which India calls atmanirbharta, and alliances, or friendships, should ideally balance the benefits and costs of doing so. Which government – ​​even as the US spends billions on subsidies and tax credits – forces companies in today’s world of unsustainably high public debt levels to stay away from the cheapest sources of inputs and technology and stay in line. In a position to compensate for the fall with choices dictated by geopolitical calculations? No company will absorb the considerable cost of giving up the advantages that manufacturing in China can offer. If companies are forced to do so, either taxpayers would foot the bill for the loss of those benefits, or companies would charge consumers for the higher cost by marking up retail prices. Can the exchequer bear the fiscal cost of the subsidy it seeks?

Instead of dashing expectations of friendliness, the focus should be on identifying and removing sources of high costs and policy errors that make Indian manufacturing less competitive than other countries. The surest way to build manufacturing skills is to attract global manufacturing to set up factories here.