To paraphrase The Beatles, we can always get by with a little help from our friends… but maybe we shouldn’t rely on them too much.
What happened: The International Monetary Fund (IMF) released new reports warning that the growing trend of friendshoring–in which countries shift trade away from geopolitical rivals to other economies with shared values–could be a net negative for global economic security.
- The IMF found that foreign direct investments are increasingly dictated by political alliance rather than geographic proximity as countries seek to secure supply chains.
Friendshoring might be good for political security, but economically, being too cliquey means putting all your eggs in one basket. When a country reduces its number of trade partners, it also reduces its diversification of risks, making it more susceptible to economic shocks.
In Canada: The government has been pro friendshoring, with this year’s budget explicitly stating that trading with other democracies is necessary to prevent "economic extortion.”
- “I think friendshoring is here,” Canada’s finance minister said last year, “...[and] we should design our government procurement and incentive programs with [it] in mind.”
Why it matters: In a simulation exercise, the IMF found that a global shift towards more exclusionary economic blocs could cut global economic output by 2% in the long term. Developing economies will likely be hit the hardest by reduced access to foreign investment.