[News Terms] 'Friendshoring' to Reduce Dependence on China... Could It Become a Hidden Threat to Inflation Pressure?

The European Central Bank (ECB) has warned that ‘Friend-shoring,’ which could put pressure on inflation (price increases), is a newly coined term combining friend, meaning a friend, and shoring, referring to a company’s production facilities. It broadly refers to economic and political actions aimed at building tightly knit supply chains among allied countries.

The concept emerged with the meaning of cooperating with trusted allies as a crisis occurred in the global supply chain due to the 2020 COVID-19 pandemic, China’s city lockdowns, and the Russia-Ukraine conflict. It was derived from ‘Ally-shoring.’

It began to be widely used in earnest after the April 2021 seminar speech hosted by the Atlantic Council by U.S. Treasury Secretary Janet Yellen. At the time, Secretary Yellen stated, "We must prevent certain countries from using their position regarding raw materials to disrupt the U.S. economy or exert geopolitical influence," proposing Friend-shoring as a way to strengthen economic cooperation among countries sharing core values and principles. Since then, Friend-shoring has rapidly progressed under U.S. leadership. The U.S. launched the Indo-Pacific Economic Framework (IPEF) to curb China’s expanding economic influence in the Indo-Pacific region and accelerated Friend-shoring by forming semiconductor alliances such as ‘Chip4’ with South Korea, Japan, and Taiwan.

However, there are considerable side effects of Friend-shoring that excludes China. The abandonment of relatively inexpensive Chinese labor costs and mineral resources has led to price increases due to rising production costs. According to the Financial Times (FT), 60% of European multinational companies that responded they had shifted production to political allies through Friend-shoring over the past five years experienced pressure to raise prices.

There is also analysis that it could threaten global financial stability. The International Monetary Fund (IMF) warned that if tensions between the U.S. and China escalate and Friend-shoring intensifies, the global investment landscape could be reshaped in a way that suppresses growth and increases risks to financial stability.