Friendshoring: A Sea Change for the Global Economy?

Jeff Rathke

President of AGI

Jeffrey Rathke is the President of the American Institute for Contemporary German Studies at the Johns Hopkins University in Washington, DC.

Prior to joining AICGS, Jeff was a senior fellow and deputy director of the Europe Program at CSIS, where his work focused on transatlantic relations and U.S. security and defense policy. Jeff joined CSIS in 2015 from the State Department, after a 24-year career as a Foreign Service Officer, dedicated primarily to U.S. relations with Europe. He was director of the State Department Press Office from 2014 to 2015, briefing the State Department press corps and managing the Department's engagement with U.S. print and electronic media. Jeff led the political section of the U.S. Embassy in Kuala Lumpur from 2011 to 2014. Prior to that, he was deputy chief of staff to the NATO Secretary General in Brussels. He also served in Berlin as minister-counselor for political affairs (2006–2009), his second tour of duty in Germany. His Washington assignments have included deputy director of the Office of European Security and Political Affairs and duty officer in the White House Situation Room and State Department Operations Center.

Mr. Rathke was a Weinberg Fellow at Princeton University (2003–2004), winning the Master’s in Public Policy Prize. He also served at U.S. Embassies in Dublin, Moscow, and Riga, which he helped open after the collapse of the Soviet Union. Mr. Rathke has been awarded national honors by Estonia, Latvia, and Lithuania, as well as several State Department awards. He holds an M.P.P. degree from Princeton University and B.A. and B.S. degrees from Cornell University. He speaks German, Russian, and Latvian.

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jrathke@aicgs.org

Karl Haeusgen

VDMA

Karl Haeusgen has been President of the VDMA since October 2020. He studied business administration in Switzerland at the University of St. Gallen. After his studies he worked for MAHO AG, then in Asia for the textile machinery manufacturer Barmag AG. Subsequently, he was responsible for HAWE Hydraulik's foreign sales and other areas within the company.

​​​​​​​​​​​​​​In 1996, Haeusgen became Managing Director of HAWE Hydraulik GmbH & Co. KG and, after the company's transformation into an SE in 2008, Spokesman of the Board of Management. Today he is Chairman of the Supervisory Board of HAWE Hydraulik SE, Munich.

​​​​​​​Haeusgen has been involved in the VDMA for many years. From 2008 to 2014 he was Chairman of the Board of Directors of the VDMA Bavaria. In 2013 he was elected Vice President of the VDMA. In October 2020 Karl Haeusgen was elected as VDMA President by the VDMA General Assembly.

This article originally appeared in German in the Frankfurter Allgemeine Zeitung.

The international order is experiencing a once-in-a-generation turning point. The fall of the Berlin Wall thirty-five years ago ended a period of deep fragmentation along geopolitical lines and enabled the acceleration of global economic integration. Today, Russia’s invasion of Ukraine and rising systemic competition present a different challenge, including for global trade. As U.S. Treasury Secretary Janet Yellen announced in April 2022, the objective of U.S. international economic policy should be “free but secure trade…favoring the ‘friend-shoring’ of supply chains to a large number of trusted countries.”

But just how far should the global economy go with a security-driven retreat from the ideal of frictionless global trade and toward new models—for example forming clubs of trustworthy partners?

Friendshoring is a useful idea—if we can agree on what it means. The United States and Germany should say “yes” to a wide and diverse circle of friends who share our broad commitments to an open and high-standard global economy. But we should be wary of a narrow definition of friendshoring that would limit trade and investment to other democracies like our own.

Make no mistake: this friendshoring shift is well underway. The Biden administration has made clear that economic efficiency is no longer the principal aim of U.S. trade policy. Instead, supply-chain resilience and national security—along with worker’s rights and environmental concerns—now drive the American economic agenda. Accordingly, generous new incentives flow to U.S. businesses only if they curtail links to certain “countries of concern.”

The Chips and Science Act and the Inflation Reduction Act, for example, not only finance new factories and jobs for key American industries of the future—they also seek to reduce America’s dependency on China for the advanced semiconductors, electric vehicles, solar modules, wind turbines, and hydrogen needed in the coming decades. President Biden’s recent decision to raise tariffs on imports from China in these key sectors doubles down on this new direction in trade policy.

But the United States is not alone in this regard. Germany has introduced a Supply Chain Due Diligence Act that requires companies to report human rights and environmental risks in their operations, in addition to a China strategy that, among other things, aims to rebalance the country’s policy to account for asymmetric dependencies. The European Union has recently passed its own due diligence legislation and is now committed to an Economic Security Strategy that reflects a more geopolitical approach to trade and investment.

The United States and Germany—with their shared high standards for the domestic and global economy and overlapping values and security concerns—are natural partners for friendshoring. The same holds true for the European Union more broadly. But what should they be doing concretely?

First, given that democratic countries make up only two-thirds of the global economy, it would be a recipe for self-impoverishment to limit trade only to them, and with no added benefit in security. Rather, trade should be restricted only in the most sensitive sectors and with the most problematic actors. The example of Vietnam is telling. This authoritarian country run by the Communist Party is nonetheless a member of the U.S.-led Indo-Pacific Economic Framework for Prosperity (IPEF) as well as the TPP-11—a major high-standard free-trade agreement with democracies such as Canada, Australia, and Japan. And Vietnam continues to attract investment as an alternative production location to China. Clearly, non-democratic countries can also be constructive economic partners.

Second, although one of the key concerns of friendshoring is to make trade more secure, geopolitical alignments are not always a helpful yardstick for deciding who is a friend. Many countries that vote against the United States or Germany in the United Nations are or could become trustworthy trade and investment partners. In short: the worlds of economic security and international diplomacy do not always neatly coincide.

Third, friendshoring for production should be distinguished from friendshoring for exports. Producing goods in problematic countries has become more challenging because of the risk of intellectual property theft, as well as unfair subsidies to home-grown companies. But selling products there poses fewer risks, as long as the emergence of new dependencies in strategic sectors is minimized. Reasonable export controls, in turn, play a crucial role in preventing bad actors from obtaining sensitive technologies.

Since the full-scale Russian invasion of Ukraine, German Chancellor Olaf Scholz proclaimed a “Zeitenwende,” or sea-change in Germany’s security and defense policy, discarding failed assumptions that lulled the country into a false sense of security. Is friendshoring a key to the Zeitenwende for the global economy? Yes, in that the United States and Europe are both engaged in rewiring their trade and investment relationships to manage the new geopolitical concerns. But no, as long as we are able to preserve the core ideas upon which globalization has been based—even in the face of rising populism and nationalism. Modern prosperity will continue to depend on robust international economic exchange, open markets, and the rule of law. Improving economic security via friendshoring will help to update these principles in our ever-more contested global trading system.