Why friend-shoring is at the top of Yellen’s agenda in Japan

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Treasury Secretary Janet Yellen is in Tokyo to meet with Japanese officials on ways to restructure supply chains to bring inflation down.

Specifically, she will talk about “friend-shoring”, a riff on the term “on-shoring” which refers to the process of reorganizing supply chains to favor countries friendly to the United States which is gaining popularity in circles. policies.

As the United States battles high inflation while keeping an eye on the geopolitical fallout from the war in Ukraine, alliances with key East Asian nations are rising to the forefront of the U.S. economic agenda .

Friend-shoring aims to increase economic cooperation with allies to avoid production and transportation problems aggravated by geopolitical developments like the pandemic and the war in Ukraine.

Yellen is meeting with Japanese business leaders on Tuesday to discuss how “buttressing friends with trusted economic partners can help ease inflationary pressures over time and resolve bottlenecks that are driving up prices for consumers,” the Treasury Department said in a statement.

The trip comes ahead of a meeting of the Group of 20 finance ministers in Indonesia later this week.

While economic cooperation with partner countries is nothing new, the idea of ​​bringing production pipelines closer together along geopolitical lines has gained new relevance in the wake of the pandemic, which has seen a wide range of policy responses. from world governments that have had tremendous economic impacts.

Strict lockdowns in China, for example, have contributed to labor shortages in one of the world’s most important job markets, resulting in production stoppages and delays that have ultimately contributed to higher prices for American consumers.

The process of “friend-shoring” is part of the broader context of globalization, which took off in the 1990s with NAFTA and the creation of the World Trade Organization, to which China joined. in 2001.

Analysts don’t think policymakers are reconsidering the fundamentals of globalization, which by and large has shifted production south while pushing technological development north. But they can refine the model.

“I don’t think we’re going back several decades here, but the last two years have caused many companies to recognize elements of fragility that they didn’t realize existed,” said Chad Syverson, an economist at the university. from the Chicago Booth School of Business, said in an interview. “Basically the machine had been built and it works great when it’s on and nothing bothers it, but you give it a little nudge and all of a sudden you have a lot of problems that you didn’t know were there. existed before. .”

Companies are taking the notion of “friend-shoring” – also known as “near-shoring” – seriously, drawing attention to deeper structural changes occurring under the more visible shocks of the pandemic and the war in Ukraine.

“These immediate effects are only part of the story,” supply chain expert Knut Alicke wrote in a May note for business operations consultant McKinsey & Co. “In fact, they may be overtaken in the long term by slower but more permanent effects on supply chains that occur below the surface.

“Supply chain leaders could face challenges with short-term shocks while laying the groundwork for deeper structural reform. Nonetheless, structural reform may be the only way for leaders to restore the resilience that businesses depend on in their supply chains, as evidenced by many of the short- and long-term implications of the disruptions,” he added. .

According to a 2020 McKinsey survey of “supply chain leaders,” many companies are moving production pipelines closer to home.

“Around 93% of respondents told us that they plan to increase the level of resilience in their supply chain. They intend to do so using a variety of mechanisms, including dual source supply of raw materials, the increase in their stocks of critical products and, to a lesser extent, the proximity, the dual source of supply or the regionalization of their supply chains”, said Alicke in an editorial of the investigation.

In addition to its economic dimension, friend-shoring has security implications. As China adds aircraft carriers to its navy in a bid to push back US dominance in the Pacific, increased economic cooperation with countries like Japan could be accompanied by closer military coordination.

Yellen’s trip follows the assassination of former Japanese Prime Minister Shinzo Abe, whose death prompted an outpouring of condolences and support for Japan from US officials.

A statement released by the United States, India and Australia after Abe’s death drew attention to the role of the Quadrilateral Security Dialogue as a regional security structure.

“Prime Minister Abe has been a transformative leader for Japan and for Japanese relations with each of our countries,” President Biden, Australian Prime Minister Anthony Albanese and Indian Prime Minister Narendra Modi said in the joint statement. “He also played a formative role in founding the Quad Partnership and worked tirelessly to advance a shared vision of a free and open Indo-Pacific. Our hearts are with the Japanese people – and Prime Minister Kishida – at this time of mourning. »

Japanese Prime Minister Fumio Kishida said on Monday he intended to continue efforts to revise Japan’s pacifist constitution to allow the country to have an official army, Japanese news agency Kyodo reported.

Such a revision had long been a political goal of Abe, who believed that the pacifist clause of the Japanese Constitution had been imposed by the United States after World War II.

During Yellen’s visit to Japan, she will also meet Japanese Finance Minister Suzuki Shunichi, the Treasury Department said. They are expected to discuss setting a price cap on Russian oil “to limit Russian military revenue while mitigating the war’s impact on gas and energy prices in America and the rest of the world.” world”.

The finance chiefs will also discuss ways to further increase economic sanctions against Russia, a US Treasury official said.

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