Friend-shoring for the Future: Washington’s New Approach Towards Asia Presents Risks and Opportunities for Businesses in the Coming Decade

Bradley Intelligence Report

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Author(s) William Samir Simpson (Bradley, Analyst)

As the global COVID-19 pandemic, Russia’s invasion of Ukraine, and rising trade tensions between the U.S. and China continue to present record challenges for the world economy, Washington is seeking to chart a new course in its trade policy, with an emphasis on durable supply chains and shifting manufacturing to lower-risk partners. One of the most important components of this aim is the “friend-shoring” strategy, termed by Treasury Secretary Janet Yellen when speaking at the Atlantic Council in April 2022, saying that the U.S. cannot allow countries to weaponize their market positions in key materials, technologies, or products against adversaries. Continuing, she declared that the U.S. would shift its supply chains from rivals to its partners, thereby being able to deepen economic integration within a bloc of friendly countries. The speech heavily condemned Russia’s actions in Ukraine and weaponization of its vast energy reserves against the West, yet mentions of China were few in comparison, despite the country being the biggest challenger to U.S. power in Asia.

Asia, or the larger Indo-Pacific region, as the White House has termed it in recent years, provides plenty of partner countries with growing economies and a desire to strengthen economic and security ties with the U.S., given a shared threat perception of China. Though countries such as Japan and South Korea fall in this group by default as highly developed countries with close military alliances with the U.S., other traditionally non-aligned countries in the region, e.g., India, Vietnam, and Indonesia, present a slew of promising partnerships that could help put the Biden administration’s friend-shoring strategy into action. Risks remain over the infeasibility of China’s manufacturing capabilities being replicated in these other countries, as supply chains don’t just change overnight. In addition, the fear remains that provocatively implementing this strategy will induce conflict between China and the U.S. Nonetheless, Washington is looking at trade with Asia differently, with greater security consideration, and potential rewards may allow for greater relative economic and social stability in the years ahead.

Geoeconomic Restructuring in Asia

Chinese policymakers worked hard to mark the country’s spot as a leading development and infrastructure partner throughout the 2010s. In 2013, China revealed the Belt and Road Initiative, a groundbreaking mass infrastructure project that came to include over 155 countries across Eurasia, Africa, and Latin America, as well as the Asian Infrastructure Investment Bank in 2016, which is a multilateral development and international financial institution created in the veins of the Western-backed International Monetary Fund and Asian Development Bank. Despite these ambitions, China faced consistent pushback from two of its regional neighbors, India and Japan, as well as from the U.S. The primary concern for New Delhi has been the inclusion of Pakistan-occupied Kashmir, which India claims as its own territory, in the China-Pakistan-Economic-Corridor, believed to be Beijing’s highest priority project in the whole initiative. Japan’s concerns are similar. Tokyo has grown increasingly anxious over China’s military expansion in the South China Sea (potentially threatening freedom of navigation) and assertiveness on the disputed Senkaku (as known by Japan) or Diaoyu (as known by China) Islands between the two countries. Moreover, Southeast Asian countries that have signed onto China’s Belt and Road Initiative have expressed their own concerns over Chinese expansionism in the South China Sea, with Vietnam, the Philippines, Malaysia, Indonesia, and Brunei protesting at various points against China’s claim of sovereignty over the water. This geopolitical reality indicates ample space for Washington to put its friend-shoring strategy to work.

Initiatives by regional actors to counter China’s moves have been underway for years, with the Asia-Africa Growth Corridor spearheaded by India and Japan in 2017 to link Japan to India and Africa through Southeast Asia and compete with the Belt and Road’s maritime route. Japanese Prime Minister Fumio Kishida also announced the “Japan-ASEAN Comprehensive Connectivity Initiative” at the ASEAN-Indo-Pacific Forum held in Jakarta in September 2023, aiming to develop infrastructure linking the region to the rest of Asia while amplifying its influence as a reliable lender in the region vis-à-vis China. Meanwhile, India has been developing its own strategy to secure its trade routes against Chinese activities in South Asia, specifically referring to Beijing’s acquisition of deep-water ports in Myanmar, Bangladesh, Sri Lanka, and Pakistan, where the naval bases stationed there represent a “string of pearls” threatening India’s power projection and, potentially, territorial integrity. In response, Indian officials termed the “Necklace of Diamonds” strategy to counter China’s “String of Pearls,” creating important military agreements with Vietnam, Japan, the Philippines, South Korea, Indonesia, Singapore, and Thailand, as well as building a deep-sea port in Iran for a corridor connecting goods through Central Asia and Mongolia to Japan.

The Free and Open Indo-Pacific framework has brought together the U.S., Japan, Australia, and India into a strategic grouping with the ability to maintain regional security through military cooperation and economic engagement, though no free-trade agreements have yet been signed. Still, the strategic grouping acts as a staging ground for greater cooperation and security coordination with collective deterrence to China’s military and economic power. For the U.S. to implement a successful friend-shoring strategy in Asia, there is ample space for convergence with the Japan-ASEAN Comprehensive Connectivity Initiative and India’s Necklace of Diamonds strategy.

Risks and Opportunities

Despite its rapid rise in the world economy over the past few decades, Beijing’s political and economic policies in recent years have exposed the risks of treating China as the world’s manufacturer. Using economically coercive measures to demand foreign companies to submit to the Chinese Communist Party’s values and interests has remained a point of contention for entities doing business in the country. Chinese President Xi Jinping’s harsh lockdown measures during the pandemic and continued crackdowns on foreign businesses and entrepreneurs have created further push factors for investors in the country, with the Financial Times reporting on Dec. 28 that nearly nine-tenths of the foreign money that flowed into China’s stock market in 2023 has already left. High-profile U.S. companies have been increasingly relocating out of the country in the past couple of years, with Apple pivoting iPhone production to India and Nike shifting footwear production to Vietnam. Yet, for companies seeking to de-risk their supply chains from Chinese exposure, friend-shoring does not eliminate risk, especially given the prospect that black market Chinese manufactured goods or raw materials (think critical minerals or EV batteries) could find their way into friendly countries’ supply chains, undermining the original aim of the strategy.

As Inu Manak and Manjari Chatterjee Miller write for the Council on Foreign Relations, the problems with the friend-shoring strategy are in the details, with ambiguity over who exactly counts as a “friend.” After all, holding the criteria to mirror the U.S.’s norms and values, politically and economically, could undermine many current prospective partners in Asia. India, despite being a democracy, has historically clashed with the U.S. concept of multilateral institution norms, being the only major economy to refuse to sign the Nuclear Non-Proliferation Treaty, rejecting negotiations to create new trade rules among willing coalitions at the World Trade Organization, and remaining reluctant to sign trade agreements with anyone, including major strategic partners. Vietnam, on the other hand, remains a constitutionally socialist state ruled under the sole leadership of the Vietnamese Communist Party, where rights to basic liberties such as freedom of speech, press, and assembly, along with the right to private property, are suppressed. On top of these misalignments, both countries have historically had a strong relationship with Russia, which may potentially complicate efforts by the U.S. to lend greater support to Ukraine. Lastly, creating a friend-shoring zone too quickly or too publicly could be viewed as provocative by China, sowing the seeds for a potential conflict between the world’s two most powerful countries.

Nonetheless, mitigating these risks could create immense value for U.S. businesses and consumers. While shifting supply chains out of China may likely raise prices for certain goods, e.g., apparel and manufactured electronics, in the short-term, building a relatively stable supply chain network across lower-risk countries can serve to greatly reduce transaction costs and other miscellaneous expenses incurred by manufacturers. Moreover, as physical and human capital investment from the U.S., Japan, and other developed country stakeholders continues, workers in manufacturing countries will become more productive over time, thus cutting labor expenses and enabling greater consumer purchasing power. The fact that India, Indonesia, and Vietnam, among other countries in South and Southeast Asia, boast some of the youngest-on-average workforces in the world adds further potential to the conviction that friend-shoring for the future will be inevitable.