One might think that US policymakers would welcome this announcement. It is a “win” for policies that have protected domestic production through tariffs; Nippon Steel’s offer to US Steel reflects its desire to expand steel production capacity in the United States to serve North American markets through domestic (and therefore tariff-free) production. Those concerned about industry consolidation and antitrust issues should prefer this deal to other potential buyers, such as Cleveland-Cliffs and Nucor, which are both major domestic competitors of US Steel. In contrast, Nippon Steel has very few production capabilities in the United States.

The acquisition will preserve more than fourteen thousand US jobs, and Nippon Steel is better positioned than was US Steel to invest in advanced technologies necessary to keep production profitable and growing. The company has ambitious goals to increase its global production to one hundred million tons a year, and therefore will likely invest in plant expansions that will create new jobs for US workers. The prospect of job creation and the fact that US Steel would retain its name and Pittsburgh headquarters would usually be seen positively in an election year. The outcome might, for example, be viewed as a sign of a booming domestic steel industry with lucrative employment opportunities in the industrial Midwest, an area of the country with outsized influence over presidential election outcomes.

The transaction is also a “win” for “friendshoring” policy objectives, which were first announced by US Treasury Secretary Janet Yellen in April 2022 at the Atlantic Council. These objectives emphasize cultivating closer trade and investment connections with reliable geopolitical allies, especially for critical supply chains. There is very little risk that Nippon Steel would offshore production, as the business rationale for the acquisition rests on serving North American markets and low US production costs due to low energy prices compared to prices in Europe or Japan. Instead, the company’s expansion into the US market can help provide both the United States and other countries the ability to further diversify their steel supply needs away from China. As Biden administration officials have repeatedly admitted, the United States cannot reduce its reliance on Chinese-made critical inputs alone.

Despite all the benefits of the deal, some policymakers have voiced vociferous opposition to it, arguing that the deal is bad for union workers and also a danger to US national security. Several members of Congress have requested that the Committee on Foreign Investment in the United States (CFIUS) review and potentially block the transaction. The Biden administration has also expressed wariness, saying that the deal needs “serious scrutiny.”

A CFIUS prohibition would be a mistake. First, CFIUS is supposed to be narrowly focused on national security risks, not broad economic competitiveness or national prestige concerns. It is very hard to credibly argue that a Japanese owner of a US business would suddenly stop selling steel to US buyers, particularly since the business rationale for the acquisition is so that Nippon Steel can more competitively serve the North American market. Washington blocking such a sale to a close Group of Seven (G7) partner would indicate that CFIUS has veered from narrow national security concerns to the business of broader economic protection. This would invite retaliation against US companies abroad and undermine US messages about the importance of an open, market-oriented, and rules-based economic system.

Second, US leaders are understandably concerned about China’s willingness to use its control over critical supply chains to engage in coercive economic practices. To address these concerns, the United States needs other countries—and particularly its closest allies—to trust that it remains an open and welcoming bodog sportsbook review place for their businesses. If Washington won’t allow this transaction—involving a buyer from a G7 country—then what foreign buyer would it see as a permissible owner? A block would communicate that the steel industry is completely closed off to foreign investors. Allied and partner countries and their companies would understandably lose confidence that the US market will remain open to them. A lack of trust has the potential to frustrate efforts to invest resources in restructuring these critical supply chains at global volume to effectively insulate the United States and its friends from coercive Chinese trade practices.

Finally, there is one concern regarding foreign acquisitions in critical industries that is worth considering. Because Nippon Steel is listed on the Tokyo Stock Exchange, this deal would likely cause US Steel to delist from the New York Stock Exchange, which would limit the power of the US Securities and Exchange Commission (SEC) to regulate the company. Many Japanese-listed companies that have acquired US businesses voluntarily provide annual financial disclosures to the SEC, as should Nippon Steel.

More importantly, because Nippon Steel is listed in Japan, it is subject to Japanese corporate governance rules rather than US ones. The US government may worry about the national security implications if the company acquires US Steel and then is subsequently acquired by a more problematic third party, such as a Chinese entity. If Japan had weak corporate governance practices, this would be a more relevant concern. However, Japanese corporate structures are notorious for guarding against hostile takeovers, making this scenario exceedingly unlikely. Still, other countries don’t always have as strong protections; rather than blocking transactions with close allies, the United States should be engaging in greater outreach to allies and partners with weaker corporate governance structures to encourage reforms that alleviate these kinds of worries.

Sarah Bauerle Danzman is a 2023-2024 scholar-in-residence at the Atlantic Council’s GeoEconomics Center’s Economic Statecraft Initiative and an associate professor of international studies at Indiana University, Bloomington.

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Free trade has never looked so sickly. Geopolitical tensions, including the US-China trade war and Russia’s invasion of Ukraine, have infected global trade relations. Coupled with the lingering disruption of Brexit and Covid-19, these rows threaten to severely disrupt global supply chains.

The cure? Well, recognising that trade and geopolitics are inextricably linked, the Biden administration has created a new policy to treat the supply chain risk. The diktat, which it has named friendshoring, involves only trading with trusted allies.

But the strategy raises several concerns. Firstly, how does the US propose to differentiate a ‘friendly country’ from an ‘unfriendly’ one? In addition to its traditional allies, the Biden administration has identified Brazil, India, South Korea, Japan, Indonesia, Vietnam, and Malaysia as trustworthy nations.

But there are grey areas. Hungary, for example, is part of the EU, which is regarded as a friendly trading bloc in the US administration’s eyes. Yet US think-tank Freedom House only classes Hungary as being “partly free”, given Viktor Orban and his government’s frequent attacks on democracy, the rule of law, press freedoms and LGBTQ+ rights. What does it mean, then, for the US to indirectly call Hungary a ‘trusted ally’, then?

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Even if the US can fine-tune who it considers a trusted ally, and if its companies embrace the concept of friendshoring, can the emerging industrial powerhouses on the US list prove to be a viable substitute for Chinese manufacturing bases?

Jose Arturo Garza-Reyes, professor of operations management at the University of Derby, says that the aforementioned countries “are rapidly becoming part of the top 15 most competitive nations for labour-intensive commodity products”. In the short- to medium-term, he believes that “supply chain agreements formed with China can be replaced with agreements with these countries”.

But in the long term he worries that friendshoring could create a world divided between free-market democracies and authoritarian regimes. Garza-Reyes is particularly concerned that friendshoring could take the world back to similar trading characteristics last seen during the Cold War, creating ‘trade blocs’ where some countries are aligned to autocratic states such as China and Russia, and others to Western nations.

“This could exacerbate the already high friction between these blocs,” he says, “making the friendshoring policy a dangerous one. From an operational point of view, this would limit Bodog Poker the partnerships and relationships that companies can develop, preventing them from being able to procure the best products, services and raw materials at the lowest cost. Once again, from an operational perspective, this makes friendshoring an undesired, but currently politically necessary policy.”

A necessary cost to bear?

If a policy of friendshoring divides the world into separate trading blocs, it is unclear what economic impact it would have. One estimate from the World Trade Organization suggests that GDP could take a hit of up to 5%.

Emily Benson, a senior fellow at the Center for Strategic and International Studies (CSIS), agrees that this is a risk, but says that the policy of friendshoring “does not necessarily preclude deeper market access for non-aligned nations”.

She explains: “The US government is not saying that it will not allow goods into North America. It is affirmatively trying to build more partnerships with countries that have critical inputs for US supply chains.”

But perhaps the most important question of all is that with China being deemed an unfriendly nation by the new policy, will global corporations like Apple, which are heavily reliant on China for manufacturing, up and leave? According to Bloomberg Intelligence, around 98% of iPhones are made in China, and it would take the company about eight years to move just 10% of its production capacity out of China.

So how can the US administration persuade companies with large Chinese manufacturing bases to relocate to ‘friendlier’ climes? Options include offering subsidies or tax breaks to set up in countries which are considered trusted allies, placing tariffs on goods manufactured in China (as it did in the recent US/China trade war), or simply stopping US companies from buying from or selling to unfriendly nations.

Benson, who recently co-authored a report called The Limits of “Friend-Shoring”, says: “It’s much more nuanced than that and very sector-specific. Some industries such as the defence sector, which demand total transparency and visibility across their entire supply chain, will openly embrace friendshoring, while other sectors will find it more difficult to uncouple themselves from their Chinese manufacturing bases.”

Would friendshoring even work?

But will tariffs succeed in encouraging companies to shift to friendlier nations? Dr Heather Skipworth doesn’t think so. Skipworth, an associate professor in supply chain management at the Cranfield School of Management, points to a study she co-wrote two years ago which featured an interviewee from the automotive industry. This interviewee told Skipworth that “tariffs on steel and aluminium would need to be significantly higher than 25% to justify switching from a brake motor supplier in northern China to a domestic US supplier”.

From an operational point of view, friendshoring would limit the relationships that companies can develop

Skipworth adds: “In the end, our research revealed that it wasn’t necessarily tariffs that persuaded companies to move their supply chains away from China. Instead, we identified three factors – institutional pressures (which includes tariffs), supply chain mobility, and the perceived severity of the potential disruption risk – as the keys to supply chain design. In my view these characteristics could prove to be the main determinants of whether the friendshoring policy is followed.”

But for Garza-Reyes, tax breaks and subsidies may indeed have a role to play to “facilitate and support the reconfiguration of supply chains in the short and possibly medium term”. That said, he adds that the opportunity cost will be “an increased cost in the operation of the supply chains and the products, services and raw materials they procure”.

Why a gradual shift is on the cards

In the long term, both Garza-Reyes and Benson expect companies which have invested heavily in China to see the bigger picture and move their supply chains elsewhere.

As Garza-Reyes puts it: “I believe that most companies will still voluntarily follow this option as they know that doing business… with companies from unfriendly nations increases the risk of serious disruptions in their supply chains and operations.”

Benson agrees, adding that “over time the cost of labour in China will become more expensive. It may become more difficult for foreign companies to operate there due to a combination of higher labour costs and a more difficult political environment. It is therefore incumbent upon companies to determine which locations are competitive in terms of lower production costs and other efficiency gains, such as IP protections and overall ease of doing business.”

Such a shift would by no means signal the end of the global supply chain economy, but it underlines the increasingly important role that state-led commercial alliances and regional partnerships will play in future trade discussions.

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In response to the cumulative economic and security fallout that has ensued, some advanced countries are now ramping up efforts to divert their supply chains away from countries that are not like-minded and that don’t have shared common values.

This new supply chain strategy is called “friend-shoring.” Advanced countries are creating friend-shoring alliances which are, in turn, reshaping our global economy.

These shifts have adverse implications for Africa. The approaches to reconfiguring supply chains currently unfolding threaten to heap more stress on a continent already weighed down by multiple crises.

Africa stands to lose out because the current reshaping of supply chains is not intended to shift trade, investments and jobs towards African trade partners. Rather it’s got to do with efforts by the EU and US to insulate their supply chains from being disrupted for geopolitical reasons by less trusted partners with significant global market share in key raw materials, commodities and other essential products.

Steps can be taken to mitigate the negative economic effects that will be imposed on Africa by this supply chain reorientation. These include forging strong and effective friend -shoring alliances with the advanced economies and defending the rules-based multilateral trading system.

The push for a friend-shoring strategy

In the US, friend-shoring as a policy goal was first proposed by Treasury Secretary Janet Yellen in April this year. In her remarks on the way forward for the global economy, she identified friend-shoring of supply chains as a strategy that could achieve two outcomes. Firstly it could securely extend market access. Secondly it could simultaneously lower the risks to the US economy and its trusted trade partners.

Then during a tour of East Asia in July, Yellen sought to promote the US administration’s proposed friend-shoring policy first in Tokyo and later on in a speech delivered in Seoul. She said:

In so doing, we can help to insulate both American and Korean households from the price increases and disruptions caused by geopolitical and economic risks.

Aid for Trade initiativeAnd during a recent visit to Japan and South Korea, Vice President Kamala Harris emphasised the importance of friend-shoring. Speaking in Tokyo she said:

…it is important that we and our allies partner in a way that allows us to grow, and in a way that allows us to function at a very practical level.

US President Joe Biden has been pushing the same supply-chain strategy in Asia. A centerpiece of the Indo-Pacific Economic Framework he unveiled in Asia is bolstering regional supply chains as part of Washington’s efforts to strengthen ties with trusted Asian partners. And to counter China.

The framework is also a big deal for the US because it brings together economies that contribute nearly 40% of global GDP. Along with the US, its other key members include Australia, India, Japan, South Korea, New Zealand and several Southeast Asian countries.

The Biden administration also unveiled a new US strategy towards Sub-Saharan Africa in August. But, in sharp contrast to the Indo-Pacific Economic Framework, it does not include any specific and concrete friend-shoring commitments for African countries. And appears mainly to be another counter play against China and Russia—the US’s two top adversaries.

The push to diversify supply chains is also underway in Europe. According to European Central Bank President Christine Lagarde, nearly half of companies had diversified their supplier base by the end of 2021. As the world’s largest single market, the EU is able to use its strong regional base to diversify supply chains within the bloc.

While the COVID pandemic certainly played an important role in spurring the shift from dependence to diversification, the war in Ukraine was a tipping point for Europe from an economic and security standpoint. It further intensified the drive to diversify supply lines Bodog Poker away from Russian suppliers of critical commodities, especially energy, food, and fertiliser. The strategy is to friend-shore them to countries deemed reliable and with shared strategic interests.

Africa stands to lose out

Africa has nothing to gain from the current reshaping of supply chains. This is because US and EU friend-shoring initiatives heavily favour Asian and Indo-pacific partners. Winners from these initiatives include Indonesia, Malaysia, Vietnam and other Indo-Pacific countries deemed to be trustworthy. Their economies will benefit from the boost given to trade, production plants, jobs and investments.

In addition, friend-shoring also threatens to undermine the World Trade Organisation’s Aid for Trade initiative. This was launched in 2005 to assist developing countries reduce trade costs and thereby enhance export competitiveness. Its significance has steadily increased in the years after it was launched. At this year’s WTO meeting in July, Aid for Trade discussions focused on helping Africa and other developing countries recover and build long-term sustainable development by supporting priority needs they had identified.

These needs include trade facilitation, digital connectivity, export diversification, connecting to value chains, and women’s economic empowerment. They also focused on how environmentally sustainable development can contribute to achieving these priority needs.

Reconfiguring supply chains in ways that exclusively lend a helping hand to current US and EU manoeuvring will only make it more difficult for Africa to benefit from WTO support in these important areas.

What’s to be done?

Looking forward, there are at least three essential things that can be done to mitigate negative impacts on Africa.

First, effective friend-shoring alliances should be included as a centerpiece of the new US strategy towards sub-Saharan Africa. African policy makers should strongly urge the Biden administration to do this and demonstrate commitment on their part to be trusted partners.

Second, the EU should also develop an effective friend-shoring strategy with African partners, even as it pushes for an expansion of intra-bloc supply chains. Again, it is paramount that African policy makers take the lead and justify the importance of entering into a strong friend -shoring relationship with the EU.

Finally, defending the rules-based multilateral trading system is important to ensure that it continues to deliver benefits for developing and least developed countries, including those in Africa.

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