America’s “friendshoring” experiment risks making enemies

American observers were not the only ones surprised and intrigued last week when West Virginia Senator Joe Manchin revisited his hitherto largely nominal party affiliation and struck a constructive deal with Democratic Senate leadership on climate and clean energy policy.

Seen from abroad, the agreement is also notable for offering one of the first apparently genuine examples of “friendshoring” — favoring strategic allies in building supply chains — seen in the wild. He pleased Canadian automakers by giving a tax break to electric vehicles built in North America, not just the US. It also favors battery minerals recycled by countries with which the US already has preferential trade agreements.

Manchin is not known as an instinctive internationalist, but discussions about energy security and cross-border oil pipelines with Canadian companies and politicians seem to have convinced him of the broader strategic need to build supply chains that exclude China.

The appeal of friend-shoring (also known as allied-shoring) has skyrocketed. First, it was exacerbated by US geopolitical tensions with China, and then exacerbated by the sanctions and trade blockade that followed Russia’s invasion of Ukraine. But this concept is still fraught with many difficulties.

Firstly, it is not always clear who your friends are and how to choose them – and even choose between them. Fireworks may light up the sky over Ontario. Manchin deal. But the EU, Japan and South Korea may also indignantly claim to be seen as geopolitical allies and even friends of the US. Brussels has already complained about the discriminatory nature of the existing electric car loan offer, which is limited to US-made products. He is unlikely to be reassured—or convinced that tax breaks are in line with World Trade Organization law—by the enchanted circle widening to include only Canada and Mexico.

Another provision in the agreement, favoring battery minerals produced or processed in countries with which the US has a preferential trade agreement, is also problematic. The list includes South Korea, but not the EU, despite years of painful trade deal talks between Brussels and Washington, and Japan.

Second, making an instant decision about political credibility in general is hard enough, but trying to figure out which friendships are likely to last is next to impossible. This also applies to other countries that value US loyalty. Another presidential term for Donald Trump or another economic nationalist of his ilk, and supply chains built around Joe Biden’s foreign policy preferences could quickly be shattered in another hysteria of indiscriminate protectionism.

In any case, few countries would be willing to become a permanent part of the American gang of friends if that opens them up to strategic and commercial retribution from Beijing. This is not only about emerging markets such as Vietnam and Brazil, which have good strategic relationships with the US, but are also closely linked to supply chains involving China. EU governments have also resisted being automatically cornered by the US, for example by refusing to impose a blanket ban on Huawei’s participation in 5G networks.

Third, the tools that governments must use to transform supply chains in line with strategic principles are inconvenient and expensive. In terms of exports, governments can restrict the sale of sensitive technologies, as the US and EU have done for semiconductors and other products for Russia and China. But in the case of imports, companies will use cheap resources, and it will take serious fiscal or regulatory efforts to force them to change suppliers on a large scale. This has implications for public finances or food prices, or both.

If the EV tax credit is not incredibly conducive to such an incredibly efficient North American supply chain that it can outperform everyone even after it is eliminated, US consumers will end up paying more for their cars. It may be hard to argue that the public should pay higher taxes or buy more expensive products because of the controversial official political risk assessment, which itself is the subject of self-serving lobbying by domestic producers.

Finally, political supply disruptions are not necessarily the biggest threat to vital imports anyway. True, sometimes government intervention for strategic purposes has very obvious consequences, such as the current shortage of food and fertilizer caused by Russia blocking exports from the Black Sea. But even before the war in Ukraine, the global economy suffered in many supply chains.

They reflected shocks in manufacturing and demand, as well as in the global shipping industry, rather than the malicious intervention of hostile governments. It would mean another awkward conversation if voters see supply chains painstakingly reconstructed through government intervention and then not working anyway.

Assuming the Manchin deal goes ahead, the tax credit provisions will be a valuable test of the ability of governments in general, and the US in particular, to shape supply chains strategically. Suggestions are understandable. Are they legal? Are they available? Will they work? Friendshoring advocates must show that the answers are yes.