Defining friendshoring – navigating a more restrictive trade environment

Defining friendshoring – navigating a more restrictive trade environment
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“Although the term is new and seemingly rising in popularity, the policy objectives behind friendshoring are not clear,” stated Pedro Antunes, Chief Economist at The Conference Board of Canada. “As a country, Canada should tread carefully in its friendshoring agenda. While there are benefits to encouraging trade with friendly nations, imposing a friendshoring agenda could be costly for Canadian businesses and consumers.”

Globally, the number of state interventions restricting trade are running four-fold higher than they were in the decade before the pandemic. Canada has seen a rise in protectionist policies in recent years, particularly with the United States and China, the country’s two largest trading partners. These include tariffs and trade restrictions and renegotiating the North American Free Trade Agreement (NAFTA).

Canada’s Budget 2023 referred to friendshoring as a way to secure delivery of critical products and to limit the economic benefits of its supply chains to itself and friends. However, there is a lack of clarity and consistency among policy-makers regarding its precise meaning and intended objectives. Moreover, there is little rationalization about what countries are considered friends, what policies can be implemented to friendshore, or even what products should be friendshored.

Friendshoring involves relocating production and supply chains to countries that share a strong bond or alliance with the home country, regardless of their geographical location or comparative advantage in delivering the said product. Friendshoring differs from reshoring in that it is not intended to make supply chains more resilient, nor bring value-added production or jobs back to the home country.

To implement friendshoring, Canadian policy-makers need to identify critical traded goods vital to Canada’s national interest and evaluate the economic impact of friendshoring policies, such as we do for free trade agreements.

The Conference Board of Canada acknowledges Canada’s commitment to greening the economy and reducing dependence on authoritarian regimes for critical goods. The report explores potential policy levers, such as incentives for clean technology manufacturing, battery production, carbon border adjustment and critical minerals mining, to align with Canada’s strategic goals.

Policy-makers should adopt a balanced approach, utilizing both incentives to promote friendly trade relationships and cautious consideration of trade restrictions when necessary.

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