Why ‘friend-shoring’ is at the top of Yellen’s agenda in Japan

Treasury Secretary Janet Yellen is in Tokyo meeting with Japanese officials about ways to restructure supply chains to bring down inflation. 

Specifically, she’ll be talking about “friend-shoring,” a riff on the term “on-shoring” that refers to the process of re-jigging supply chains to favor U.S.-friendly countries that is gaining popularity in policymaking circles.  

As the U.S. battles high inflation while keeping an eye on the geopolitical fallout from the war in Ukraine, alliances with key countries in East Asia are rising to the forefront of the U.S. economic agenda.  

Friend-shoring aims to increase economic cooperation with allies to avoid production and transportation snags made worse by geopolitical developments like the pandemic and the war in Ukraine. 

Yellen is meeting Tuesday with Japanese business leaders to discuss how “friend-shoring with trusted economic partners can help ease inflationary pressures over time and address the bottlenecks that are raising prices for consumers,” the Treasury Department said in a statement. 

The trip comes ahead of a meeting of the Group of 20 finance ministers in Indonesia later this week.   

While economic cooperation with partner countries is nothing new, the idea of bringing production pipelines into closer coordination along geopolitical lines has gained a new relevance following the pandemic, which saw a huge range of policy responses from world governments that had sweeping economic impacts. 

Strict lockdowns in China, for example, contributed to labor shortages in one of the world’s most important labor markets, which translated into production stoppages and delays that ultimately contributed to higher prices for U.S. consumers. 

The process of friend-shoring exists within the broader context of globalization, which took off in the 1990s with NAFTA and the establishment of the World Trade Organization, which China joined in 2001. 

Analysts don’t think that policymakers are reconsidering the fundamental tenets of globalization, which by and large moved production to the global south while pushing technological development in the global north. But they may be refining the model. 

“I don’t think we’re turning back the clock by decades here, but the last couple years have made a lot of companies recognize elements of fragility that they didn’t realize were there,” Chad Syverson, an economist at the University of Chicago Booth School of Business, said in an interview. “Basically, the machine had been built and it works really great when it’s on and there’s nothing bothering it, but you give it a bit of a bump and all of a sudden you get a lot of problems you didn’t know were there before.” 

Businesses are taking the notion of friend-shoring — also referred to as “near-shoring” — seriously, calling attention to deeper structural changes occurring beneath the more visible shocks of the pandemic and the war in Ukraine.

“These immediate effects are only part of the story,” supply chain expert Knut Alicke wrote in a May note for business operations consultant McKinsey & Co. “In fact, they may be overtaken in the long term by slower-moving but more permanent effects on supply chains occurring beneath the surface.”

“Supply chain leaders could face challenges with short-term shocks while installing the building blocks of deeper structural reform. Nonetheless, structural reform may be the only way for leaders to restore the resilience that companies depend on from their supply chains, as is evident from several of the short- and longer-term implications of the disruptions,” he added.

According to a 2020 survey of “supply chain leaders” performed by McKinsey, many companies are in the process of bringing production pipelines closer to home.

“About 93 percent of respondents told us that they plan to increase the level of resilience across their supply chain. They intend to do that using a variety of mechanisms, including dual sourcing of raw materials, increasing their inventories of critical products and, to a lesser extent, by near-shoring, dual-sourcing, or regionalizing their supply chains,” Alicke said in a write-up of the survey. 

In addition to its economic dimension, friend-shoring has security implications. With China adding aircraft carriers to its navy in a bid to push back on U.S. dominance in the Pacific, increased economic cooperation with countries like Japan could go along with tighter military coordination. 

Yellen’s trip comes in the wake of the assassination of former Japanese Prime Minister Shinzo Abe, whose death prompted an outpouring of condolences and support for Japan from U.S. officials. 

A statement released by the U.S., India and Australia following Abe’s death drew attention to the role of the Quadrilateral Security Dialogue as a regional security structure. 

“Prime Minister Abe was a transformative leader for Japan and for Japanese relations with each one of our countries,” President Biden, Australian Prime Minister Anthony Albanese and Indian Prime Minister Narendra Modi said in the joint statement. “He also played a formative role in the founding of the Quad partnership, and worked tirelessly to advance a shared vision for a free and open Indo-Pacific. Our hearts are with the people of Japan — and Prime Minister Kishida —  in this moment of grief.” 

Japanese Prime Minister Fumio Kishida said Monday that he intends to move forward with efforts to revise Japan’s pacifist Constitution to allow the country to have a formal military, Japanese news agency Kyodo reported. 

Such a revision had long been a political goal of Abe, who believed the pacifist clause in Japan’s Constitution had been imposed by the United States after World War II. 

During Yellen’s visit to Japan, she will also meet with Japanese Finance Minister Suzuki Shunichi, the Treasury Department said. They’re expected to discuss setting a price cap on Russian oil “to limit revenue for Russia’s military while at the same time dampening the impact of the war on gas and energy prices in America and globally.” 

The finance chiefs will also talk about ways to further increase economic sanctions on Russia, a U.S. Treasury official said.