February 4, 2023

It wasn’t just US observers who were surprised and intrigued last week when West Virginia Senator Joe Manchin recalled his hitherto largely nominal party membership and struck a constructive deal with the Democratic Senate leadership on climate and clean energy policy.

Seen from abroad, the agreement is also notable in that it represents one of the first seemingly real examples of “friendshoring” — favoring strategic allies in building supply chains — seen in the wild. It has delighted Canadian automakers by granting a tax credit to electric vehicles assembled in North America, not just the US. It also favors battery minerals processed by economies with which the US already has preferential trade agreements.

Manchin isn’t exactly 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 friendshoring (also known as ally-shoring) has risen sharply. It was first heightened by the US’s geopolitical tensions with China and then accelerated by the sanctions and trade blockades that followed Russia’s invasion of Ukraine. But the concept remains fraught with multiple difficulties.

First, it’s not always clear who your friends are and how to choose them – and indeed choose between them. There may be fireworks lighting up the skies over Ontario at the Manchin-Schumer deal. But the EU, Japan and South Korea can also indignantly claim that they are considered geopolitical allies, even friends, of the US. Brussels has already complained about the discriminatory nature of an existing proposed EV credit limited to US-made products. It is highly unlikely that the charmed circle will extend to just Canada and Mexico.

See also  Helen Skelton breaks down in tears ahead of making her Strictly Come Dancing debut

The deal’s other stipulation, to give preference to battery minerals produced or recycled 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 negotiations for a trade deal between Brussels and Washington, nor Japan.

Second, taking a snapshot of political trustworthiness in general is hard enough, but trying to figure out which friendships are likely to last is nearly impossible. So are other countries judging US loyalty. Another presidential term for Donald Trump, or any other economic nationalist in the same vein, and supply chains built according to Joe Biden’s foreign policy preferences can quickly be destroyed in another tantrum of arbitrary protectionism.

Either way, few countries will invariably want to be part of an American friend-gathering gang if it opens them up to strategic and commercial retaliation from Beijing. These are not only emerging markets such as Vietnam and Brazil that have good strategic relations with the US, but are also strongly intertwined with supply networks involving China. EU governments have also resisted being automatically dragged into the corner of the US — for example, by refusing to impose a blanket ban on Huawei’s participation in 5G networks.

Third, the tools that authorities have to reshape supply chains along strategic lines are inconvenient and expensive. On the export side, governments can restrict the sale of sensitive technology, as the US and EU have done for semiconductors and other products for Russia and China. But with imports, companies will opt for cheap inputs and it will take serious fiscal or regulatory efforts to get them to switch suppliers on a large scale. This has implications for public finances or product prices, or both.

See also  Royal Mail issues stark warning as workers prepare to strike again

Unless the EV tax credit improbably promotes such an incredibly efficient North American supply chain that it will be able to outperform all entrants even if it is removed, American consumers will end up paying more for their cars. It can be difficult to argue that the public should pay higher taxes or buy more expensive products because of a controversial official assessment of political risks, which themselves are subject to self-interested lobbying by domestic producers.

Finally, in any case, a politically motivated interruption in supply is not necessarily the greatest threat to essential imports. Admittedly, there are sometimes very obvious consequences of government interference for strategic purposes, such as the current food and fertilizer shortages caused by Russia’s blocking of exports from the Black Sea. But even before the war in Ukraine, the global economy was in crisis in many supply chains.

These reflected shocks in production and demand from the manufacturing and global shipping industries rather than malicious interventions by hostile governments. It will be another awkward conversation if voters see supply chains laboriously redesigned through state intervention and then fail to work.

Assuming the Manchin-Schumer deal holds up, 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 according to strategic considerations. The questions about the proposals are clear. Are they legal? Are they affordable? Will they work? It is the duty of friendshoring advocates to show that the answers are yes.

[email protected]