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How Geopolitics is Changing International Trade

Current geopolitical tensions could have far-ranging implications for global trade, according to The Wall Street Journal (subscription).  

“Friend-shoring” rises: With geopolitical tensions on the rise, some governments have urged international companies to shift more business to allied countries. This trend has been nicknamed “friend-shoring,” and supporters say it can benefit geopolitical alliances by protecting access to crucial raw materials that keep important industries running.

Case in point: The fallout of Russia’s invasion of Ukraine has illustrated the role friend-shoring can play amid geopolitical tensions. For example, the European Union announced an embargo on Russian oil this week, effectively limiting European oil purchases to friendly countries. As a result, European oil prices have increased.

  • Russia’s war “may prove to be a tipping point, causing geopolitics to become more important for the structure of global supply chains,” said European Central Bank President Christine Lagarde. “In this context, it looks increasingly unlikely that the disinflationary dynamics of the past decade will return.”

Potential downsides: Economists at the World Trade Organization project that the creation of a two-bloc world, with one bloc centered on the United States and the other on China, would result in a 5% loss of global economic output over a 10- to 20-year period.

What the Biden administration is saying: U.S. Treasury Secretary Janet Yellen argues that friend-shoring should be viewed as an attempt to adapt to geopolitical changes that are already underway, like China’s efforts to boost its economic autonomy.

  • “I believe that we need to consider how to incentivize the ‘friend-shoring’ of supply chains to a greater number of trusted countries for a variety of products, so we can continue to securely extend market access, with lower risks to our economy, as well as to those of our trade partners,” said Yellen.

The NAM’s perspective: The NAM advocates for the negotiation of trade agreements that ensure that the United States is writing the rules for the global economy. Without such deals, the U.S. risks being left behind our global competitors, many of which are actively negotiating new, wide-reaching agreements that exclude us.

  • As NAM Vice President of International Economic Affairs Ken Monahan said to INPUT in April, “manufacturers in the United States need diverse sources for trade to ensure supply chain resiliency—supported by a robust network of market-opening, comprehensive, enforceable trade agreements and other arrangements with U.S. allies.”
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