Friend-shoring: the medium-term answer for international trade after the war in Ukraine

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Five months into the war in Ukraine, much of the world’s attention has focused on the short-term impact of the war. Critical reductions in Russian and Ukrainian exports have led to soaring commodity prices, threatening trade flows, external balances and, above all, the food security of many countries. The price of oil has risen sharply. Despite the slight slowdown on recession fears in recent weeks, it has raised concerns about deteriorating energy security. Understandably, everyone is focused on rising commodity prices, a major short-term issue.

The US and EU imposed sanctions with the express intention of cutting off Russia’s ability to wage war on Ukraine. Russia, however, found other ways to finance the war. Russia supplies 12% of the world’s oil and gas. Although Urals oil prices are 30% lower than Brent, the world, with two notable exceptions, has avoided the former. China and India have sharply increased their imports of Russian oil despite being net exporters of petroleum products. Given the current price of oil, Russia earns more oil today than it did before the war. Importantly, the world price of oil is lower than it would have been had China and India purchased oil from non-Russian sources.

This required a different tactic and the American response, endorsed by G-7 leaders, was to cap the price of oil sold by Russia so that Moscow would accept a lower payment while supplying the same amount of oil to the market. This can have serious unintended consequences and backfire. Why would China, India, and indeed the rest of the world accept the lower price knowing that it would only work if Russia chose not to retaliate? In fact, Russia’s public finances and external balances are now strong enough to fight back. Analysts suggest that Russia could hold back around three million barrels a day without hurting its public finances. This would have a catastrophic effect on the oil market, pushing the price of oil to $192, experts say.

The world does not seem to have focused on the medium-term implications that could inextricably alter the fundamental flow of trade finance if US Treasury Secretary Janet Yellen’s “special address” to the Atlantic Council on April 13 on “the future of the global economy and the economic leadership of the United States” is all there is to it. Much of this momentous change is a direct result of supply chain challenges caused first by pandemic-related disruptions in the Chinese supply chain and more recently by the war in Ukraine and the complexity of get other countries to join the boycotts deemed necessary. by the United States. As Yellen said, Russia’s blatant violation of international law and the “fundamental principles of the UN charter” has exposed the position of other countries regarding the international order.

Stressing the multilateral character of the countries imposing the sanctions, she attributed the costs borne by Russia and the effectiveness of the message sent by the G7 and the EU that Russia was no longer welcome as a trading partner of this partnership.

Learning from the collateral effects of war, the new mid-term policy would move from relocation to “friendly relocation of supply chains”, ensuring not just free trade but secure trade. Friend-shoring, as the name suggests, would involve supply chains only in countries that share core values ​​and principles ranging from privacy in the digital world to human rights. Market access could thus be safely granted to trusted countries as “friends”, thereby reducing risks to the U.S. economy and to those of the “friends”, who would now be the chosen trading partners. .

What would relocating friends accomplish? This would change current supply chains and end the current reliance on countries with which the United States has geopolitical tensions. This would avoid the risk of unreliable suppliers. How does friend shoring work? It works similar to the establishment of a sanctions regime for Russia, where the US and the EU, in partnership, have been more successful than they would have been alone. He also draws lessons about countries that would initially be their friends and with whom they might be comfortable. In this new framework, you would work to create a partnership with “a group of countries that strongly adhere to a set of norms and values ​​about how to operate in the global economy”. These partnerships should be strengthened so that the supply of critical materials is guaranteed. Close ties with like-minded countries would ensure a reliable supply of essential goods.

This would allow these countries to adhere to a set of standards in certain areas, including the environment, privacy, labor law, arrangements for digital businesses and services, and more. However, the envisioned group would not be closed – Yellen described it as plurilateral. Yellen also spoke about the changes in the Bretton Woods 1.0 institutions in order to adapt to the new global financial governance. Bretton Woods 2.0 should then be attentive to the notion of trust. For production to be efficient, as Bretton Woods 1.0 did by opening up trade and creating capital markets, supply chains would need to be resilient. Countries that could not be trusted and posed a threat to supply chains and national security and had poor human rights records should be persuaded to reform to join this committee of nations . As such, neutrality might not be an option in the medium term, although it may seem like a winning strategy now.

The author is a political economist formerly at the World Bank

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