US promotes ‘friend-shoring’ of trade with eye on China, Russia

Seoul, South Korea – United States Secretary of the Treasury Janet Yellen has used a visit to South Korea to call for the “friend-shoring” of supply chains in partner countries to mitigate soaring inflation and shortages of key goods.

After touring a South Korean battery facility on Tuesday, Yellen highlighted the threat posed by “unreliable countries” and reiterated calls for US allies such as South Korea and Japan to boost trade cooperation to ensure the smooth movement of goods.

Yellen said countries could use friend-shoring to build limited networks for the trade of essential or complementary goods, bypassing the risks presented by relying on unfriendly countries.

While Yellen did not identify any unfriendly countries by name, the top US official in April described Russia and China as threats to the global economic order, which should not be allowed to use their market position to “disrupt our economy or exercise unwanted geopolitical leverage”.

Yellen is nearing the end of an Asia trip that also included stops in Japan and a meeting of finance officials from Group of 20 (G20) countries in Indonesia.

Throughout her trip, Yellen has condemned Russia’s invasion of Ukraine while castigating Russian President Vladimir Putin for launching a destabilising war at a time when the global economy is grappling with the fallout of the COVID-19 pandemic and climate pressures.

The US Department of the Treasury said in a statement after Yellen’s meetings in Indonesia that the war in Ukraine “has caused global spillovers in food, energy, and other commodities” and that “a price cap on Russian oil” could “restrict revenue to Putin’s war machine and limit the impact of Russia’s war on energy prices”.

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US Treasury Secretary Janet Yellen has called for greater trade cooperation among US allies such as South Korea and Japan [File: Ahn Young-joon/pool visa AFP]

Friend-shoring, however, is not certain to solve the urgent problems of high energy and food prices.

Some economists argue that the strategy compromises the free trade that is necessary for goods to remain plentiful and affordable in markets around the world. Analysts have also argued that friend-shoring relationships can backfire when countries that feel excluded restrict supplies of goods as a response.

Deborah Elms, executive director of the Asian Trade Centre in Singapore, said friend-shoring can be “distorting” but it remains to be seen what kind of effects the system Yellen is calling for might have.

“If [friend-shoring] is firms making decisions about sourcing or supplying to ‘less risky’ locations, that may not be all that much different from current behaviours,” Elms told Al Jazeera.

“Governments already adjust the rules to favour some locations over others by, for example, signing trade agreements to remove impediments to trade or facilitate the movement of goods and services between their markets,” Elms added.

“At the moment, governments don’t seem to be doing more than encouraging firms to think about friend-shoring. If that switched to become an active set of policies to clearly give preferences to some markets over others, it could become much more problematic.”

Efforts by Washington to direct trade through regional allies could also further inflame competition with China, the world’s second-largest economy.

The two superpowers are already engaged in a tense competition for economic and military influence in Asia, leaving middle-power countries like South Korea to make at-times difficult calculations about how to maintain productive ties with both.

Colin Mackerras, a professor at Griffith University in Australia, said the US should aim to foster cooperation instead of boosting ties with particular countries while excluding others.

“A reasonable grouping would best include China, not exclude it,” Mackerras told Al Jazeera.

“It is the top economy in Asia by any calculation and likely soon, despite recent and not-so-recent reversals, to be the top in the world. We should work together to solve problems, not compete.”

After touring a battery factory operated by LG Energy Solution, a subsidiary of LG, a major South Korean conglomerate, Yellen was set to pay a visit to President Yoon Suk-yeol, who took office in May pledging to bolster ties with the US.

Yellen will also meet with her South Korean counterpart Choo Kyung-ho, with whom she will discuss a price cap on Russian oil aimed at limiting Moscow’s revenues, and Bank of Korea Governor Rhee Chang-yong.

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South Korean President Yoon Suk-yeol has sought closer ties with the United States [File: SeongJoon Cho/Bloomberg] (Bloomberg)

The two countries have a comprehensive alliance that stems back to when they fought on the same side in the 1950-53 Korean War. Yoon accused his predecessor, left-wing President Moon Jae-in, of compromising ties with Washington as part of an ultimately fruitless drive for reconciliation with North Korea, the South’s nuclear-armed neighbour.

Yoon could be motivated to display closeness with Washington as his approval ratings slide amid a sluggish economy and a scandal involving the party leader of his conservative People Power Party.

While Seoul and Washington share a desire for deeper trade cooperation, both sides face thornier decisions about how to manage economies beset by rising inflation and low growth.

With inflation in June hitting its highest level since the 1997-98 Asian financial crisis, the Bank of Korea recently unveiled an historic 0.5 percentage point hike to its benchmark interest rate – a move aimed at cooling the economy and bringing down prices that also risks stifling borrowing and investment.

South Korean policymakers customarily face pressure to keep pace with US interest rates to prevent investors from pulling their money out and moving to other markets that promise higher returns.

“The greatest challenge for Yoon, at least for now, is exchange rate instability and the capital flight problem. But that’s mostly beyond his control,” Shin Se-don, a professor of economics at Sookmyung Women’s University in Seoul, told Al Jazeera.

“To prevent havoc, the government has to raise the interest rate at least as much as the US.”

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