#47 What is friendshoring?

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Your faithful writer,
Dr. Daniel Smith

Ms. Yellen goes to Santiago

Over the weekend, U.S. Treasury Secretary Janet Yellen traveled to Chile to meet with Chilean President Gabriel Boris and other leading government officials.

This wasn’t your normal diplomatic mission — Janet Yellen is one of the most influential economic policymakers in recent U.S. history. She is:

• A former economics professor

• The first person to serve as both Federal Reserve Chair and Treasury Secretary

• The first woman to hold either position

• One of President Biden’s most trusted voices on global economic trends

So why did she go on a days-long visit to Santiago, the capital of Chile, to promote U.S.-Chilean relations?

What is friendshoring?

During her visit to the South American country of 20 million, Yellen spoke about:

• the American-Chilean relationship

• Chile’s abundant mineral reserves

• the hottest new buzzword in American foreign policy: “friendshoring.”

The Economist defined friendshoring as a “government push[ing] businesses to restructure supply chains, shifting production away from geopolitical rivals to friendly powers.”

In the case of the U.S, the shift to friendshoring as part of American foreign policy is largely about moving critical supply chains away from China and into countries that are trusted U.S. allies.

During her visit, Yellen explained her vision of friendshoring in Chile:

During her speech, she referred to the importance of Chile’s mineral reserves and the country’s place in the “clean energy supply chains” that the U.S. wants to build as part of its friendshoring strategy:

Why lithium?

Chile is home to some of the largest lithium reserves in the world. The so-called ‘Lithium Triangle’ in South America is home to ~60% of the world’s lithium reserves, and there has been massive investment in lithium extraction and processing in the region in recent years.

Lithium is a key component of electric vehicle (EV) batteries, and any plans to increase U.S. electric vehicle production in the coming years will require access to lithium. 

China also aims to become a world-leader in EV production, potentially setting off a race for lithium and other minerals needed to produce EVs.

A Chinese firm announced a $233.2M investment in a lithium processing plant in Chile last year. The investment deal, which is linked to a similar deal in neighboring Argentina, will give the Chinese firm access to Chilean lithium at a preferential price.

Lithium prices have been extremely volatile since COVID, surging more than 150% in 2022 before dropping dramatically last year.

Who is friendshoring good for?

The primary reason that the U.S. is promoting its friendshoring agenda in Chile is to signal to the Chilean government (which controls the nation’s lithium supplies) that America will be a better business partner than China.

Proponents of friendshoring are advocating for similar policies in other mineral-rich countries that have attracted foreign direct investment (FDI) from China.

Others, however, have criticized the move to friendshoring.

Economist Raghuram Rajan, who led the Reserve Bank of India from 2013 to 2016, argued in 2022 that friendshoring would harm global free trade by prioritizing investment in countries with close ties to world powers like the U.S.

A paper published by the International Monetary Fund (IMF) estimated that friend-shoring could reduce global economic output by up to 4.7%.

Moreover, the IMF argued that friendshoring could increase the risk of a global economic downturn by concentrating economic risks in a handful of countries.

ART OF THE DAY

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Yours,
Dan