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“Friend-Shoring”: From Rhetoric to Reality and Options for Australia

31 Mar 2023
By Dr Naoise McDonagh
A large earth moving at a minerals mine. Source: Carol M Highsmith/

Greater organisation for the protection of critical minerals industries from economic coercion is on the agenda for major nations, with China’s actions providing a catalyst. A key platform for the agenda will be May’s G7 summit in Hiroshima. 

“Friend-shoring” as a policy idea has gained traction in recent years, receiving significant media coverage in 2022 when U.S. Treasury Secretary Janet Yellen used the term in a speech at Korean conglomerate LG’s Science Park in Seoul. Yellen stated, “Working with allies and partners through friend-shoring is an important element of strengthening economic resilience while sustaining the dynamism and productivity growth that comes with economic integration.”

What exactly is friend-shoring and how does it increase economic resilience? Friend-shoring is a derivative concept related to the idea of economic onshoring, which involves businesses relocating international supply chains back to their domestic economy. This can be driven by a variety of commercial reasons, from changes in economic competitiveness between countries, to a desire to have more control over supply chain management.

In reality, friend-shoring is driven by geopolitical rather than purely economic logic, and involves relocating critical supply chains away from nations considered likely to weaponise economic dependency and towards safe nations, be they “friends,” formal allies, or partners who are geopolitically low risk. Since governments typically must balance idealism with pragmatism when engaging foreign policy, safe-shoring is ultimately a more realistic term than friend-shoring, since the main goal of the policy is reducing dependence on high-risk nations, rather than only trading with formal allies or friends. Safe shoring has the benefit of allowing for greater market competitiveness by including more economies as options for supply, without compromising security.

In a major report in 2021 on supply chain risk, the Biden administration explained the US approach as follows: “the United States has a strong national interest in U.S. allies and partners improving the resilience of their critical supply chains in face of challenges [including] geopolitical competition with China.” While other nations that are allies or partners with the U.S. are usually less direct in stating China as their core concern, safe-shoring as policy is currently mostly aimed at Beijing.

A key test case for safe-shoring is the critical minerals sector. There are three reasons for this. First, critical minerals are crucial inputs for military end-use capabilities and high technology more broadly. Second, China currently dominates major parts of the global critical mineral supply, refining 68 percent of nickel, 40 percent of copper, 59 percent of lithium, and 73 percent of cobalt. Combine those points with the fact that China regularly weaponises economic relations, including twice shutting off critical mineral supplies to Japan (in 2010 and 2012) over territorial disputes, the geopolitical motives for safe-shoring critical minerals is clear.

The question for supporters of safe-shoring is how to get from rhetoric to reality, given that it requires both unilateral regulatory actions and also coordination between multiple governments to become effective.

At the unilateral level, investment screening actions by Canada and Australia – designed to exclude investors from “high risk” nations – offer instructive examples of what is needed to implement safe-shoring domestically. In 2022, the Canadian government announced a new policy under the Investment Canada Act, confirming that foreign state-owned enterprises (SOEs) would only be able to invest in Canadian-registered businesses in the critical minerals sector on an “exceptional basis.” Even then, such exception would come only after a full national security review was undertaken, marking a significant hardening of attitudes in Ottawa towards Chinese SOE investment. Describing critical minerals as “strategic assets that contribute to Canada’s national security [and] as vital inputs to defence and high technology,” the government followed its announcement with a review of the sector. This resulted in three Chinese foreign investors being required to divest stakes in Canadian critical minerals businesses. The divesting firms were Sinomine Rare Metals Resources, Chengze Lithium International Limited, and Zangge Mining Investment.

Australia’s Foreign Investment Review Board (FIRB) has also significantly tightened investment screening in the critical minerals sector. Regulatory reforms implemented on 1 January 2021 outline the position that critical mineral production and supply is a key national security interest. In February 2023, FIRB blocked Yuxiao Fund, a Singaporean-registered private investment fund owned by Chinese national Yuxiao Wu, from increasing its ownership stake in Australian heavy rare earth producer Northern Minerals from 9.92 percent to 19.9 percent on national security grounds. In 2020, Northern Minerals was also subject to a FIRB review when a proposed investment agreement with a Chinese government-backed group, “Baogang Group Investment,” was blocked.

The EU announced its European Critical Raw Materials Act in March 2023, aimed at diversifying and safe-shoring a portion of its domestic raw materials requirements across various supply chains for critical minerals. Key benchmarks for 2030 are laid down as follows: at least 10 percent of the EU’s annual consumption extracted within the EU; at least 40 percent of the EU’s annual consumption processed in the EU; and not more than 65 percent of the Union’s annual consumption of strategic raw materials from a single third country.

Internationally, Australia has called for its Quad (quadrilateral security dialogue) partners of India, United States, and Japan to increase collaboration on critical mineral supply chains, while the Five Eyes group of Anglo-phone countries is also enhancing their cooperation to address China’s dominance over minerals supply. Canada and Japan jointly announced plans in 2023 for enhanced collaboration in battery metal supply chains. Like Japan and Australia, Canada has also experienced Chinese economic coercion with Beijing blocking imports of Canadian beef, pork, and canola seeds following Huawei’s Meng Wanzhou’s detention in Vancouver due to an extradition request from Washington.

The safe-shoring concept is making an institutional breakthrough milestone at this year’s G7 Leaders Summit in Hiroshima in May. Japan’s Prime Minister Fumio Kishida has made economic security a major agenda item, and reports suggest the G7 major economies are set to call for the creation of groupwide supply chains for strategically important goods. Core early focus will be on goods classed as critical to national and economic security, including critical minerals, advanced chips, and high-tech dual use goods.

While safe-shoring has its critics, particularly those who question its viability, it is largely an untested concept in the broader global economy – although the concept is a reality within the defence sector. By reducing dependency on China for critical minerals, importing countries reduce their risk of economic coercion, thereby enhancing economic resiliency. This explains why there is strong political and regulatory momentum growing behind the concept in liberal democracies.

From an Australian perspective, engaging with the G7 Japan-initiative would be a logical next step given the country was the fourth largest global producer of critical minerals in 2021, and is already cooperating with G7 members on supply security issues. In fact, the G7’s safe-shoring initiative may be a good opportunity for the group to consider Australian membership.

All told, ongoing developments at safe-shoring may have China’s leaders feeling uncomfortable at a time when its economic growth engine is arguably more fragile than any time since 1978. Yet it should also give Beijing cause to reflect on its use of economic coercion, which has undoubtedly been a major catalyst for safe-shoring policy.

Dr Naoise McDonagh is a Senior Lecturer in the School of Business and Law, Edith Cowan University, and former President of the Australian Institute of International Affairs South Australia.

This article is published under a Creative Commons License and may be republished with attribution.