Photo: Flickr / Steve Jurvetson / CC BY 2.0 DEED

How the green transition is pushing ‘ally-shoring’ up the supply chain management agenda

The demand for critical minerals has surged as more geopolitical complexities have emerged, making so-called ‘ally-shoring' a mechanism for the US and other western nations.

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Following the supply chain turbulence of the pandemic, which was in turn preceded by the impact of Russia’s invasion of Ukraine, the concept of nearshoring has been pushed further up the supply chain management agenda.

However, post-pandemic, other terms such as ‘friend-shoring’ and ‘ally-shoring’ have also been touted as strategies – particularly in the US.

What is ‘ally-shoring’ though? When could it apply, and will we see more of it in the future?

The concept of ally-shoring

As Forbes wrote back in 2021, ally-shoring is a relatively new concept promoted by the US-Mexico Foundation and Brookings.

The idea behind the strategy is to strengthen and deepen joint manufacturing, R&D, trade, security, and governance ties between the US and Mexico.

However, it can naturally be applied to other countries and regions, and given the geopolitical instability of the last couple of years, ally-shoring could be set to become much more than a passing supply chain FAD.

Perrin Beatty, CEO of the Canadian Chamber of Commerce, summed up the apparent move towards ally-shoring back in May.

Speaking at Stanford University’s 2023 State of the West Symposium, Beatty said:

“We’ve learned that many issues can’t be resolved by countries acting alone. The simple fact is that globalisation — as we had come to know it during the 80s and 90s, the early part of the 21st century — is a thing of the past. We’re seeing increasingly that political factors and political alliances are reshaping the nature of the global economy.”

Why ally-shoring is becoming more prevalent

Ally-shoring has come into sharp focus when it comes to critical mineral supply chains – especially those that are key to facilitating the green transition from fossil fuel-powered vehicles to electric and hydrogen.

One of the issues here, besides the significant global demand for these materials, is the potential trouble The West could encounter by having too much dependence on countries not considered as allies, such as China.

This predicament was emphasised by Liesje Schreinemacher, the Netherlands’ Minister for Foreign Trade and Development Cooperation, during an event held at Twente University in October.

Schreinemacher began her speech by highlighting the global challenges posed by ongoing conflicts, such as the war in Ukraine and the crisis in the Middle East.

She also acknowledged that geopolitical tensions make sourcing sought-after minerals even harder for European businesses:

“Speaking from a Dutch and European point of view, there’s a harsh reality we need to face: we’re far too dependent on critical raw materials sourced mainly from just a few countries. And not all of these countries see things the way we do,” said the Minister for Foreign Trade and Development Cooperation.

Ally-shoring, China, and critical mineral supply chains

Schreinemacher then went on to emphasise the staggering increase in demand for these resources, noting that by 2040, the world will require 42 times the current supply of lithium, 21 times more cobalt, and 19 times the current nickel resources.

The Minister also highlighted the need to wane off sourcing from China:

“The stark fact is that we simply cannot do without China at this time. This is a huge dependency that we need to phase out as soon as possible. Particularly because we’ve seen that this is a country that does not shy away from misusing these dependencies to its own advantage,” said Schreinemacher.

The urgency among western nations to go down this route can be seen by the critical minerals agreements that have either been agreed or are in the process of being ratified.

A case in point is the EU-US critical minerals agreement. As a recent EU Parliament briefing confirms, the aim of the deal is to foster supply chains in raw materials needed in the production of electric vehicle batteries.

“The EU is seeking to strengthen the international supply chains of critical minerals, facilitate trade, and improve sustainability and labour rights. It is also pushing for the inclusion of more than 50 minerals and materials relevant to the green transition in the agreement’s scope,” read a fragment of the aforementioned briefing.

The US also has a similar agreement with Japan that was announced in March of this year.

Commenting on the agreement, US Ambassador Katherine Tai made comments implying a strategy of ally-shoring, referring to Japan as allies and stressing the USA’s ambitions to strengthen supply chains:

“Japan is one of our most valued trading partners and this agreement will enable us to deepen our existing bilateral relationship. This is a welcome moment as the United States continues to work with our allies and partners to strengthen supply chains for critical minerals, including through the Inflation Reduction Act,” said Tai.

Tai’s comments echo that of US Government colleague Janet Yellen, the country’s Treasury Secretary.

Yellen has spoken on numerous occasions about harnessing ‘friend-shoring’, an alternative term for ally-shoring.

In an address made to the Atlantic Council in April 2022, Yellen said:

“I would see that involving friend-shoring, that we have a group of partners we feel comfortable with our geopolitical—we’re not worried about geopolitical issues. We know that we can count on them, rather than take a purely domestic approach. I think we get the benefits of continued efficiencies in production by having a group of partners who work to shore up supply chains and make them more resilient.”

Regarding China, Yellen added:

“I think China needs to take seriously working with us, and it’s not just the United States. Europe and other countries share concerns about some of the practices that China has that negatively impact our national security, human rights concerns. I would like to see us preserve the benefits of deep economic integration with China, not going to a bipolar world, but clearly that’s a danger that we need to address.”

Can ally-shoring be sufficient to meet demand?

Will allyshoring be sufficient to meet demand for critical minerals in The West? Some critics have their doubts.

In a co-authored opinion piece published in June, Shubham Dwivedi, a Faculty Fellow at Georgetown University’s Science, Technology, and International Affairs department, and Gregory D. Wischer, Executive Vice President at cobalt refinery company Westwin Elements, expressed the opinion that “the United States and its allies lack mining production and mineral reserves to satisfy long-term US demand.”

Dwivedi and Wischer thus conclude that the US must “secure additional critical minerals beyond its borders and the borders of its allies.”

The co-authors argue that the best way to do this would be for the government to financially support US companies in signing offtake agreements with trusted overseas mines, acquiring existing overseas mines, and developing new overseas mines.

The risks calculations being made when it comes to ally-shoring

As for minimising risk, there are signs that companies are already weighing up geopolitical factors and their influence on supply chains.

Speaking to the New York Times 12 months ago, Willy Shih of Hazard Business School said that companies were increasingly including geopolitics in their risk calculations.

Given the aforementioned Issues with China and Russia, as well as the Israel/Palestine situation, such calculations appear increasingly complex.

Ally-shoring and the rise of BRICS

Another potential issue on the horizon concerns BRICS, an intergovernmental organisation comprising Brazil, Russia, India, China, and South Africa.

A forecast made in August by Bloomberg Economics predicted that should Indonesia and Saudi Arabia’s BRICS applications be accepted, the enlarged group would account for 44% of the global economy by 2040 — more than double the G-7’s forecast share of 21%.

In the same month, Hippolyte Fofack, chief economist and director of research at the African Export-Import Bank, said that the expansion of BRICS could turn the bloc into an “even more powerful geopolitical coalition that could accelerate the process of dedollarisation and the transition to a multipolar world.”

Source: European Commission

On the other hand, amidst all this, an EU trade deal with Brazil is being ratified, while an agreement with India is currently at the negotiating stage.

It goes without saying that India has many ties to The West, making its role in BRICS, and its relationship with Russia, difficult.

Brazil is another large trading nation that takes pride of place in BRICS, and has been very welcoming of Chinese investment. A recent example of this is the financial incentives Brazil has offered to electric vehicle manufacturer BYD in order for the company to open a factory that had been left vacant by Ford.

Moreover, while South Africa has its own domestic problems, it is also well known as a supplier of chrome, platinum, titanium, iron ore, gold and diamonds.

Taking all of this into account, it would be very tough for The West to stop sourcing from these nations.

The consequences of widespread ally-shoring across the globe

So what would happen if global trade did become interrupted by mass ally-shoring, and trading within blocs?

According to the World Trade Organisation, global GDP would take a hit.

In a 2022 WTO report on the economic impact of Russia’s invasion of Ukraine, the WTO acknowledged the possibility of a scenario whereby geopolitical economic blocs could become the norm.

The report stated if this outcome came to fruition, global GDP could fall by a not-insignificant sum in the long run:

“Longer term impacts [of the war] could also be large and consequential. There is a risk that trade could become more fragmented in terms of blocs based on geopolitics. Even if no formal blocs emerge, private actors might choose to minimise risk by reorienting supply chains. This could reduce global GDP in the long run by about 5 per cent, notably by restricting competition and stifling innovation,” reads the report.

Why ally-shoring can’t be ignored

Despite the downsides of ally-shoring mentioned above, such as the loss of global trade and GDP, the fact remains that the geopolitical climate, and concerns about potential trade barriers to come, will have to be taken into account by supply chain managers.

Another important point to make, irrespective of whether one wishes to embark on a strategy of reshoring, nearshoring, friend-shoring or ally-shoring, is that getting a particular country out of a supply chain is easier said than done.

This was emphasised by renowned supply chain expert Yossi Sheffi, Director of the MIT Center for Transportation & Logistics, during an interview hosted here on Trans.INFO.

As Sheffi explains, the complexity of the ecosystem means simply switching factories won’t be enough:“In terms of reshoring, most companies are talking about moving production out of China. However, the media gives the impression that if you get a factory out of China, or you get your supplier out of China, then you’re out of China. The supply chain is an ecosystem though – it’s a huge network of suppliers and their sub-suppliers and their sub-suppliers. It goes all the way to the mine or the agricultural field where the raw material comes from,” the Professor told Trans.INFO.


Photo: Flickr / Steve Jurvetson / CC BY 2.0 DEED