February 21, 2023
Offensive friendshoring and deteriorating US-China relations
Friendshoring is a concept US Secretary of the Treasury Janet Yellen first mentioned in a speech at the Atlantic Council on April 13, 2022. The policy places key nodes of an international supply chain of strategically critical products in countries or jurisdictions friendly to and reliable for the United States. It intends to reduce US reliance on, and vulnerability to, a potentially hostile country—such as China.
Friendshoring includes the concept of nearshoring (bringing production near to consumer markets) and reshoring (repatriating production back to the home market). It was intended to be a defensive posture to enhance the resilience of supply chains. Efforts to friendshore have been observed in several important sectors—as highlighted in “Our guide to friendshoring: sectors to watch.” For example, the US government has invested in rare earth mining and processing facilities in the United States and Australia to reduce its reliance on China. In the process they have reduced China’s global market share in these critical minerals from 80 percent to 60 percent.
However, friendshoring has recently been used as an offensive policy tool, rather than defensive. As articulated by US policy makers, their goal is to ring-fence international supply chains for strategic goods, such as advanced computer chips, in friendly countries. They hope to use friendshoring to exclude China from essential supply chains to delay its economic and military modernization. This aggressive approach is part of the high-tech war between the United States and China, which has become the main arena for their strategic competition.
The weaponization of friendshoring escalates US-China strategic competition. It is therefore important to identify its implications. First, offensive friendshoring will make it more difficult for the United States to encourage the European Union, Japan, and other allies to fully align their China policy with the United States. Second, it could push China to respond more aggressively than the mainly defensive measures adopted so far. This will make managing US-China strategic competition, and preventing open military conflicts, more difficult going forward.
The weaponization of friendshoring
The United States weaponized the concept of friendshoring by continuing to elevate the goals of the strategy, as summarized last September by US National Security Adviser Jake Sullivan. Though initially intended to reduce US reliance on China in global supply chains, the recent aggressive approach is designed to help the United States “prevail in strategic competition with China.” It is driven by the assessment, articulated in the 2022 US National Security Strategy, that “the People’s Republic of China…is the only competitor with both the intent to reshape the international order and, increasingly, the economic, diplomatic, military and technological power to advance that objective.” Friendshoring is now expected to go beyond just preserving the US lead over China—for example, in advanced computer chips by two chip generations. It also aims to widen such strategic leads as much as possible, in the process derailing, delaying, and retarding China’s economic and military modernization. Essentially, this strategy aims “to impose costs on adversaries, and even over time degrade their battlefield capabilities.”
The United States has taken several actions to implement this approach, with varied success.
In October 2022, the United States significantly widened the scope of its ban on sales to a greater number of Chinese entities. The ban now included not only advanced chips, but also the equipment, designs, and software necessary to manufacture them—as well as banning US persons from participating in those activities. The United States also used its Foreign Direct Product rule to prohibit non-US companies from providing China with banned products if they contain US ingredients—including intellectual property.
After a period of intense negotiation, the United States convinced the Netherlands and Japan to agree to join its ban on the export of crucial equipment—such as the extreme ultraviolet lithography systems—necessary to fabricate the most modern chips (smaller than 14nm). However, Japan has already indicated that it will opt for milder restrictions than the United States. It is likely that the Netherlands may do likewise as details of the agreed ban are ironed out. Their reticence reflects the incomplete alignment of China policy between the United States and its allies. The more aggressive the US measures, the more challenging it is for the United States to obtain full buy-in from its allies.
The United States and India agreed last month to elevate and expand their joint initiative on Critical and Emerging Technology—or iCET—to foster “technology partnership and defense industrial cooperation.” The agreement covers artificial intelligence, quantum technology, high performance computing, advanced wireless, space activities, defense systems, and resilient semiconductor supply chains.
The United States has also launched its proposal for a CHIP 4 Alliance with Japan, Taiwan, and South Korea to coordinate steps to secure the supply chain for advanced chips in the region. However, the proposal has encountered resistance from the invited countries, mostly South Korea, given their substantial economic links to China—and has yet to take concrete shape.
Most recently, after shooting down the Chinese spy balloon flying over US airspace, the Biden Administration added six Chinese government-backed entities with links to the balloon program to the Entity List. The recently formed House Select Committee on the Strategic Competition between the United States and Chinese Communist Party “might also press for tougher measures to slow advancement of Chinese military capabilities.”
All together, these measures intend to exclude China from international supply chains crucial in producing advanced chips—and potentially other high-tech products. After all, the industry leader accounting for more than 90 percent of the global output of advanced chips—Taiwan Semiconductor Manufacturing Company—cannot operate in isolation. It depends on the United States for chip design and software; on the Netherlands and Japan for chip making equipment; and other countries including China for raw materials. It cannot function without close international collaboration with leading companies and suppliers in many countries. It will be very difficult and costly—if not impossible— for China to replicate the advanced chip ecosystem all by itself. If fully implemented, these exclusion measures could delay and retard China’s efforts to modernize its economy and military.
The US offensive use of friendshoring risks pushing China to take strong countermeasures.
So far, China has primarily responded to US chip restrictions with defensive steps. Besides filing a complaint with the World Trade Organization against what it called “US trade protectionist practice,” China plans to roll out a $143 billion package to support its semiconductor sector, as part of its effort to become self-sufficient in high tech.
China has increased domestic production of legacy chips (those from 14nm and above—not subject to the US bans but still required in most modern products)—to increase its global market share. Its market share grew from a negligible amount in 1990, to 10 percent around 2010, and about 15 percent now—just ahead of Japan, the United States, and Europe, but lagging behind Taiwan (22 percent) and South Korea (21 percent). China’s progress cuts into sales and revenue opportunities for US and Western firms and strengthens China’s central role in supplying manufactured goods using legacy chips. In addition, China’s top chip maker, the Semiconductor Manufacturing International Corp, has announced that it can now manufacture 7nm computer chips. However, there is doubt about its ability to do so at scale without the advanced equipment—which has been banned.
Most recently, two of China’s influential scientists wrote in the bulletin of the Chinese Academy of Sciences that the country should launch a counter strategy by amassing “a portfolio of patents that govern the next generation of chip making, from novel materials to new techniques…giving China the clout to push back against US sanctions”.
Theoretically, China can respond more rigorously to US tech containment measures. For example, it could limit or withhold the supply of goods it enjoys dominant market shares for. These include key minerals such as rare earths or chemical ingredients crucial for the West to produce many goods including pharmaceuticals. However, doing so will hurt the Chinese economy as well, since global production and consumption would likely plummet. While this dismal prospect has constrained China so far, more aggressive countermeasures cannot be excluded if the US tech containment strategy gains traction with allied countries and effectively derails China’s modernization plans.
In short, the increasingly offensive use of an offensive US friendshoring policy will make it more challenging to manage US-China strategic competition, and make a military conflict—with disastrous global consequences—more not less likely. Containing China’s high-tech development will make it more difficult to encourage China to cooperate with the United States in other areas, such as climate change and disease control, among other global issues. Despite Biden’s intention to “seek competition and not conflict” with China, the US-China relationship continues to deteriorate. The stakes are rising for all.
Hung Tran is a nonresident senior fellow at the Atlantic Council; a former executive managing director at the Institute of International Finance and former deputy director at the International Monetary Fund.