Author: Editorial Board, ANU

It is one of the blessings of old friends, as Ralph Waldo Emerson once wrote, that you can afford to be stupid with them. Stupidity is perhaps a harsh word for the general direction of international economic policy in the age of COVID-19 and the Russian invasion of Ukraine, but it is not wholly inapt, either. The idea — increasingly popular among policymakers, particularly in the West — that international trade and investment should predominantly take place between close geopolitical friends is supposedly a solution to a darkening geopolitical environment, but the economic implications could be as disastrous as the rhetoric is slick.

Ships are shown offshore at the port of Long Beach as supply chain problems continue from Long Beach, California, US, 22 November 2021 (Photo: Reuters/Mike Blake).

Ships are shown offshore at the port of Long Beach as supply chain problems continue from Long Beach, California, US, 22 November 2021 (Photo: Reuters/Mike Blake).

Since we cannot trust all of our trading partners to have our best interests at heart, the argument goes, we should do our best to concentrate our trade and investment where they are unlikely to be threatened by geopolitical manoeuvring. Superficially, there might seem to be something to this idea: China has tried to leverage its weight in international trade to extract political concessions from countries as far afield as Australia and Lithuania. Surely it would be better for countries to concentrate their interests in places where the geopolitical risk of doing business is minimised?

The first problem this idea runs into is a practical one. How does a country diversify its trading partners? Trade and investment may be recorded by statistical agencies as taking place between two countries, but in practice, these transactions take place between businesses. Even if it made geopolitical sense for a country to have a more diversified set of trading partners, the means by which governments can influence these decisions are limited to old-fashioned state-subsidised industrial policy and protectionism: neither of which are at all likely to make economies better off. Even if governments could persuade businesses to change where they do business, why would governments be any better at identifying and mitigating risk than entrepreneurs who at least have skin in the game?

More broadly, the newfound enthusiasm for ‘friendshoring’ is a result of drastically overestimating the extent to which geopolitical risk itself — rather than panicked political reaction — threatens national economies. Almost a year on from the Russian invasion of Ukraine, the hopes that economic coercion could be brought to bear to force the Russian army back behind its borders have largely faded. Russia will still pay a steep price for its unprovoked aggression, due to unprecedented sanctions, but the bill will come due only in the medium term. And most importantly of all, the notion of onshoring or friendshoring production runs counter to the most basic principle of economics — comparative advantage. The likely result will be increased costs, higher inflation and very little additional security.

Russia’s attempt to blackmail Western Europe by withholding gas exports will inflict a much more serious economic injury but at the cost of long-term damage to Russia’s reputation as a source of energy. It is unlikely to ever regain its prewar position as one of Europe’s most important energy trading partners. True, trade in energy will as a consequence be ‘onshored’ and ‘friendshored’ but this is a result of the ordinary operation of market principles — not a new paradigm of international economic interaction.

In this week’s lead article, Adam Triggs and Sam Hardwick take a hard look at the rhetoric of ‘friendshoring’ and find it wanting. They argue that it ‘facilitates security–nationalist policies that waste resources and undercut the strategic benefits of openness’. The former is a major problem in an era in which fiscal restraint is now crucial for many countries in Asia. The latter is a point worth reiterating: since the end of the Second World War, Asia has managed to build prosperity alongside peace. A return to the bad old days of securitised trade threatens both.

‘Friendshoring’, ‘trusted trade’: these are euphemisms for an idea that is essentially the resurrection of the old imperial trading blocs of the interwar years, predicated on the notion that the benefits of free trade are only worth having if they come with a free geopolitical insurance policy too. But as Triggs and Hardwick point out, risk management does not mean never taking any risks: it means preparing for unforeseen difficulties and building a flexible, resilient economy. There are a number of relatively straightforward policy settings that are necessary, both domestically and internationally: ‘Automatic stabilisers in tax and transfer systems ease economic stress without requiring any new legislative action. Lowering trade costs, whether through agreements, customs reform or infrastructure investment, eases the pain of adjustment by making it cheaper to find new markets.’

The world is a more uncertain and a more dangerous place than it was even a year ago. Responding to that requires a level-headed and comprehensive approach to risk, rather than the superficially attractive but naïve approach of assuming that risk can be managed by concentrating it in small, unwieldy networks of ‘friends’ chosen on the basis of geopolitics rather than economics.

The EAF Editorial Board is located in the Crawford School of Public Policy, College of Asia and the Pacific, The Australian National University.