Friendshoring offers Canada both risks and opportunities in trade

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Canada should tread carefully when implementing a “friendshoring” policy, according to a new assessment from the Conference Board of Canada that points out the potential economic pitfalls of attempting to reshape trade patterns.

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As geopolitical upheaval, led by China’s economic and authoritarian policies, the United States’ increasingly protectionist trade measures and Russia’s invasion of Ukraine, threatens supply chains around the world, the Canadian government, like many others, has been looking to enhance ties and trade with safe or friendly nations.

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But governments need to establish firm goals and understand the downsides as well as the opportunities, the think tank said in a July 31 report.

“No matter what policies are implemented, friendshoring will likely result in tit-for-tat trade wars, higher production costs, and an erosion in the purchasing power of Canadian households,” the report said.

The Conference Board said embarking on proper strategy planning is especially important for Ottawa as economies strive to hit net-zero goals. Escalating threats from climate change offer economic opportunity, since the country possesses critical minerals key to the transition away from fossil fuels. The most recent federal budget highlighted friendshoring as a way of sharing those resources with allies.

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Yet, a concrete definition of friendshoring remains hazy, which introduces risks for policymakers. For example, countries Canada deems friendly now can change abruptly, as illustrated by heightened tensions with China after the arrest of Huawei Technologies Co. executive Meng Wanzhou in 2018. There is also little consensus among policymakers on the right policy strategies to implement, as well as which goods should have their supply chains reconfigured in the name of friendshoring, the report said.

The policy may also pose economic risks. As it stands, two-thirds of gross domestic product comes from international trade and if foreign countries impose sanctions in response to friendshoring policies, severe consequences can ensue. Such consequences were evident when China slapped tariffs on Canadian wheat and canola in 2019, sending prices plummeting.

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Recent efforts by Canada to revamp its trade plan have drawn criticism. Carlo Dade, a trade director at think tank Canada West Foundation, said the government’s allocation of trade funds in its most recent budget implies its priorities are misplaced.

“(Ottawa) put more money in the last budget to improve ferry service in Eastern Canada than they put in for the national gateway and corridor funds,” Dade said.

Other countries have taken bigger steps to shore up global trade in the midst of geopolitical headwinds, and are moving toward friendshoring and more protectionist policies. For example, in the U.S., President Joe Biden has allocated more than US$369 billion in tax credits and other incentives under the Inflation Reduction Act to support homegrown supply chains in green manufacturing and technology, along with the renewable, critical mineral and electric vehicle industries.

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Canada has yet to announce a policy of similar magnitude, though it recently offered up to $30 billion in incentives to secure the country’s first electric vehicle (EV) battery plant as it seeks to build out its own net-zero supply chain.

The Conference Board said Canada has already taken a friendshoring approach to trade by looking to partner with Asia-Pacific countries as it attempts to wean itself off of China.

Still, the Conference Board said the country has more work to do if it wants to make friendshoring a vital part of its trade strategy.

“If Canada wishes to pursue a friendshoring agenda, more research is required to identify what traded goods are critical to our national interest and economic success,” the report said.

• Email: bbharti@postmedia.com | Twitter: biancabharti

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