The Changing Landscape of Global Trade

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From globalization to reshoring and friendshoring: The new U.S.-China trade dynamic

Global trade has undergone significant transformations over the last few decades, with globalization facilitating extensive interconnectedness among economies. However, recent trends suggest a reevaluation of these extensive supply chains, primarily through reshoring and friendshoring. This shift stems from concerns about dependency on distant or potentially adversarial economies, exemplified by tensions between the United States and China. Companies and governments are increasingly considering strategies to enhance supply chain resilience, but the deglobalization many anticipated has yet to materialize fully.

This piece explores the concepts of deglobalization, reshoring, and friendshoring, examining their impacts on the global economy and contrasting the nuances of reshoring and friendshoring. It analyzes the U.S.-China relationship as a central factor in this shift and assesses China’s continued ability to dominate global trade due to its cost advantages in production.

Defining the Concepts: Deglobalization, Reshoring, and Friendshoring

• - Deglobalization refers to the reversal of globalization, characterized by the reduction in cross-border trade, investment, and interdependence between countries. It implies a retreat from complex global supply chains and a return to national or regional production bases.
• - Reshoring involves bringing production and manufacturing processes back to a company’s home country. The main motivation for reshoring is to reduce reliance on overseas suppliers, improve supply chain resilience, and bring jobs back to the domestic economy.
• - Friendshoring, on the other hand, is a strategic approach where countries or companies choose to rely on trusted allies for critical production and sourcing. This concept reflects the desire to balance supply chain security with cost efficiencies, creating networks among countries with aligned economic or geopolitical interests.

While reshoring and friendshoring represent targeted moves to protect supply chains and enhance security, deglobalization would suggest a more profound reduction in global interconnectivity. However, data suggests that true deglobalization is yet to be observed in any significant measure.

Despite the COVID-era expectations that the reopening of borders would be marked by a reversal of globalization trends, trade flows remain robust, with global supply chains adapting rather than retracting. Instead, reshoring and friendshoring have emerged as more practical responses to geopolitical tensions, providing countries with greater control over essential supply chains without a complete withdrawal from global trade networks.

The U.S.-China Relationship: Strategic Competition and Economic Interdependence

One of the primary motivations for reshoring and friendshoring is the evolving U.S.-China relationship. The United States perceives China as both a significant economic competitor and a potential security threat, especially in sectors critical to national security, such as technology and manufacturing. This strategic competition has led to policy measures like tariffs, investment restrictions, and initiatives to boost domestic production, exemplified by the CHIPS Act aimed at reshoring semiconductor manufacturing.

However, fully disengaging from China remains challenging. China’s production efficiency and low labour costs make it difficult for many U.S. companies to abandon Chinese suppliers entirely. Instead, countries like the United States are adopting a more nuanced approach, encouraging production diversification while maintaining essential trade relationships with China.

China’s Competitive Advantage: Production Costs and Trade Dominance

China’s dominance in global manufacturing is rooted in its ability to offer low production costs, driven by a combination of factors such as scale, labour availability, and supportive industrial policies. While the strategic competition between the U.S. and China intensifies, China’s manufacturing sector continues to attract companies seeking cost efficiency. The country’s advanced infrastructure, developed logistics networks, and massive workforce enable it to produce goods at a scale and cost that few other nations can match.

This advantage allows China to maintain, and even expand, its share of global trade, despite efforts by other countries to diversify their supply chains.

China’s production ecosystem, often referred to as the “world’s factory,” provides end-to-end capabilities, from raw material sourcing to manufacturing and export logistics. This integrated model makes it challenging for other countries to compete directly, as China can undercut prices while offering comparable, if not superior, efficiency. For companies reliant on low-cost manufacturing to sustain profit margins, transitioning away from China often implies higher costs and potential operational disruptions.

Yet this reliance on China carries risks. The COVID-19 pandemic exposed vulnerabilities in overly concentrated supply chains, and the geopolitical landscape has added urgency to diversification strategies. Nonetheless, the pragmatic approach for many firms and governments is to keep China as a core part of their supply chain while selectively shifting some production capacity to other countries through friendshoring initiatives.

The Role of Friendshoring: A Middle Ground Strategy

Friendshoring provides an alternative for countries seeking to diversify supply chains without sacrificing the cost advantages that globalization has traditionally offered. By relocating production to allied nations, companies can mitigate risks associated with overreliance on countries like China while maintaining cost efficiency. For instance, Mexico has become a favourable friendshoring destination for U.S. companies due to its proximity and trade agreements under the Canada-United States-Mexico Agreement (CUSMA, or USMCA, as it is known in the U.S.), which streamline cross-border production.

However, friendshoring strategies must also consider dependencies on critical raw materials that force trade with specific countries. For example, China’s dominance in rare earth elements, essential for electronics and renewable energy technologies, means that even with friendshoring, countries must engage with China to secure these materials. Similarly, the Democratic Republic of Congo’s control over cobalt supplies, crucial for lithium-ion batteries, compels companies to maintain trade relationships despite geopolitical and ethical concerns.

This approach aligns with broader geopolitical goals, fostering stronger economic ties among allied nations while acknowledging the strategic necessity of securing raw materials. Countries like Japan and South Korea, which have historically depended heavily on China, are now incentivizing companies to shift production to Southeast Asia. The emergence of Vietnam and India as manufacturing hubs reflects this trend, as these nations benefit from both lower costs and geopolitical alignment with Western economies. Nonetheless, the reliance on specific raw materials underscores the complexity of achieving true supply chain resilience.

Implications for Global Trade and Economic Policy

The shift toward reshoring and friendshoring carries significant implications for global trade patterns. First, it introduces a new layer of complexity, as supply chains become more segmented based on strategic alliances rather than purely cost considerations. This transition is likely to lead to higher production costs globally, as firms diversify away from China’s low-cost manufacturing base.

Governments are playing an active role in shaping these trends by offering subsidies and incentives to encourage domestic and allied-region production. In the U.S., for example, policies like the Inflation Reduction Act and CHIPS Act reflect an active government stance in reshoring critical industries, from semiconductors to electric vehicles. These policies aim not only to strengthen domestic supply chains but also to mitigate potential disruptions in the face of rising geopolitical tensions.

Despite these shifts, true deglobalization remains unlikely. Instead, the world appears to be moving toward a model of “selective globalization,” where countries maintain trade relationships within trusted networks while safeguarding strategic industries.

This selective approach balances the benefits of global trade with the security of diversified supply chains.

TSMC and Apple’s Approaches to Deglobalization

In response to the shifting geopolitical landscape and the need for supply chain resilience, both TSMC and Apple have adopted distinct strategies — reshoring and friendshoring respectively — heavily influenced by government incentives and strategic considerations.

TSMC’s Strategy: Geographic Diversification

Taiwan Semiconductor Manufacturing Company (TSMC) has embarked on a strategy to construct semiconductor fabrication plants (fabs) outside of Taiwan, significantly supported by government initiatives due to the strategic importance of semiconductors. By building fabs in countries like the United States, Europe, and Japan, TSMC aims to ensure continuity of operations in the face of potential geopolitical conflicts in the Taiwan Strait. Governments in the U.S. and Japan have provided substantial financial incentives and policy support for TSMC’s local semiconductor investments. The U.S. CHIPS Act exemplifies this approach, offering significant subsidies to bolster domestic production and develop skilled labour pools.

TSMC collaborates with local governments and companies to navigate regulatory environments and integrate into local supply chains effectively. Fabs being developed target regional strengths and market focuses: mature nodes for consumer and automotive markets in Japan, for automotive and industrial use cases in Germany, and the only leading-edge node outside of Taiwan in the United States. TSMC’s Arizona fab demonstrates this success, securing highly critical technology while achieving levels of efficiency previously thought unattainable outside of Taiwan.

Apple’s Strategy: Focus on India

Conversely, Apple’s strategy has focused on diversifying manufacturing away from Chinese suppliers toward India, which it views as both a significant assembly hub and a promising market.

This shift began with iPhone production in India in 2017. By expanding operations in India, Apple aims to reduce its reliance on Chinese manufacturing, mitigating risks from geopolitical tensions, market concentration, and potential supply chain disruptions. In line with the friendshoring approach, India represents a vast and growing market for Apple products, with its large and youthful population, rising disposable incomes, and increasing smartphone penetration offering substantial growth opportunities. Additionally, the Indian government has introduced various incentives to attract foreign investment in manufacturing, including the Production Linked Incentive (PLI) scheme, which benefits companies like Apple.

While approximately 14% of iPhones are now produced in India, it’s important to note that Apple still relies on its domestic Chinese suppliers, such as Hon Hai (Foxconn), who are expanding their operations within India. This highlights that despite diversification efforts, the interconnected nature of global manufacturing makes completely severing ties with established Chinese suppliers nearly impossible, as they continue to play a significant role, even in new manufacturing hubs.

Balancing Cost Efficiency and Security in a New Global Landscape

As companies and countries reassess their global supply chains, reshoring and friendshoring emerge as pragmatic responses to the challenges posed by a shifting geopolitical landscape. While full-scale deglobalization remains improbable, selective globalization enables economies to balance cost efficiency with the security of supply chain resilience.

The U.S.-China relationship will continue to influence global trade dynamics as countries reevaluate dependencies and seek alternative partnerships. Friendshoring strategies allow companies to mitigate risks while preserving globalization’s economic efficiency. In this evolving environment, understanding the balance between cost, security, and alliance-based trade will be critical for firms navigating the complexities of global supply chains.