In the last few years, the global trade landscape has faced significant change as companies around the world have sought to reassess their supply chains in the face of a wide range of challenges.
Disruptions caused by Covid-19, geopolitical tensions and conflict in Ukraine and the Middle East have all had an impact on the way firms do business, especially when it comes to international trade. As a result, many companies have looked for new solutions to make their operations more secure, form new relationships and take advantage of deals like free trade agreements.
With this has come a range of new terminology and buzzwords to be aware of. Indeed, many firms have started talking about 'friendshoring', 'nearshoring' and more. So what are these terms, and what do they mean for international trade?
Nearshoring: Moving closer to home
Nearshoring sees businesses move away from long-distance trading relationships in favor of partners with closer geographical proximity to their home markets - often focused on nations that share a border. This has the advantage of offering faster speed to market and minimizing issues such as shipping disruption - something that is a particular concern following attacks in the Red Sea and 2021's disruption in the Suez Canal.
One example of this is the relationship between the US and Mexico, which has become increasingly important for industries such as auto manufacturing in recent years, while the trade agreement between the EU and Turkey has also helped boost nearshoring in Europe. However, it is not without its risks, as if firms rely too heavily on certain partners simply because they are close, they may be vulnerable to shifting political relationships or other changes in circumstances.
Friendshoring: Seeking like-minded trade partners
Friendshoring, by contrast, is more concerned with geopolitical issues and focuses on countries that have close political and cultural connections. This is a strategy that has been emphasized in the US in recent years in the wake of strained relations with partners such as China.
US treasury secretary Janet Yellen has stated: "Friendshoring means that we have a group of countries that have strong adherence to a set of norms and values and we need to deepen our ties with those partners."
Friendshoring offers the promise of more resilience and security in the supply chain and improved efficiency, as compliance regulations are likely to be in closer alignment. However, it may mean businesses have more limited options, so become dependent on one or two key countries for materials or goods.
Reshoring: Putting domestic supply chains first
With growing uncertainty surrounding global markets, some businesses are opting to minimize their reliance on international trade entirely. This is resulting in a growing trend towards 'reshoring', or bringing back supply chains within a company's own national borders.
This can further reduce risk, shorten supply chains and help support local economies, but it could also mean higher production costs, significant capital investment and the need to comply with a whole new set of regulations.
What are the potential consequences of these trends?
The best way to guard against disruptions in the market and ensure trade is as streamlined as possible is to have a diverse supply chain that does not rely too heavily on a few select partners. This is a potential risk with all of the above trends, so it will be important that firms have contingencies in place and are able to use effective tools to find the most advantageous trade agreements.
Indeed, director-general of the World Trade Organization, Ngozi Okonjo-Iweala, has warned against trade fragmentation and friendshoring, noting: "A friend today may not be a friend tomorrow."
