Friendshoring.
Sounds like a nice word, doesn’t it? It evokes images of two countries holding hands and happily walking down the path to duty-free trade. But shifting production to more “tariff-friendly” countries isn’t necessarily the free pass some think it is.
Given the heightened interest in friendshoring in the wake of increased U.S. tariffs on Chinese imports, we wanted to clarify exactly what a friendshoring strategy is and dispel some myths associated with the term. To do that, we sat down with trade compliance expert, Karen Kenney, for a Question and Answer briefing.
Q: What is friendshoring?
It’s moving supply and production to a country with friendly trade ties with the importing country, often where a free trade agreement is in place. Some view friendshoring as synonymous with “nearshoring.” This can be accurate since a U.S.-based brand that shifts production from China to Mexico is both nearshoring and friendshoring. But in the most literal sense, nearshoring is about bringing the cargo closer to home to shorten the supply chain.
Q: What is the biggest misperception about friendshoring?
A lot of people think they are simplifying and streamlining trade compliance with friendshoring. But often it complicates compliance.
Q: How so?
It’s not just about where products are made, but also where the components come from. If the majority of Chinese components for a personal computer that is assembled in Mexico have the same HS code chapter as the PC, then the PC does not qualify for duty-free status. The country of origin and compliant tariff code for all components need to be considered when making a duty determination. On the other hand, since the components for a leather jacket – leather from Brazil, zippers from Poland, cotton material from El Salvador – are classified in different chapters than the finished goods, they could qualify for duty-free status since they were substantially transformed in Mexico into a completely new product. Each free trade agreement and country Customs service has detailed rules about how country of origin is determined and whether goods qualify for duty free status. A trade compliance expert can help you figure this out. It’s not as black and white as many businesses think.
Q: What is driving the friendshoring trend?
The duty rates out of China are skyrocketing. The main driver is reducing these import duties – and it’s coming from the boardroom. There are millions of dollars at stake, so businesses are certainly wise to explore the strategy.
For imports to the U.S., e-commerce is another driver of friendshoring. U.S. law allows a duty exemption for any goods imported by one person on one day – if the goods are valued at less than USD $800. This relatively high “de minimis” threshold in the U.S. has led companies to bypass U.S. distribution centers and send imports directly to e-commerce fulfillment centers in Mexico and Canada for later delivery into the U.S. Some in Congress are looking to reduce the de minimis value (or eliminate it for countries like China) to undermine this duty avoidance play. But, for now, it’s a lucrative strategy for many – and huge warehouses are popping up at U.S. land borders as a result.
Q: With all the benefits of friendshoring, it still sounds like you’d suggest proceeding with caution.
You don’t want to move your entire operation to Vietnam or Indonesia or Mexico only to find the expected duty savings are not real. You just need to do your due diligence and consult with experts to ensure the positive result you’ve set out to achieve.
Q: From a U.S. perspective, is friendshoring just about moving products to Mexico to avoid duties?
Well, the numbers don’t lie. Chinese exports to Mexico have been continuously rising. In one recent quarter there was a 68% rise. One can assume that people in Mexico are not suddenly consuming 68% more Chinese goods.
You can’t ship products from China into Mexico, put a Made in Mexico label on it, repackage it, and then file paperwork reporting that products were wholly made there. Trade compliance requires more detailed proof than a change of address. That’s what companies must recognize.
Q: What’s the downside of moving too fast?
If you don’t do your due diligence, you can find that the savings you expected from a friendshoring strategy are not possible. If you’ve shared those anticipated savings with shareholders in your budget forecasts, that’s a problem.
Q: Do you have any examples of companies that moved too quickly?
Unfortunately, yes. At one large consumer goods company the Trade Compliance Manager was not consulted when the Procurement Dept. asked this company’s largest supplier to shift operations to Mexico to avoid a punishing tariff. Repeated inquiries about the origin of these newly sourced products prior to the first shipment from the new factory went unanswered, so the Compliance Manager visited the supplier’s “new production facility” in Mexico. When he arrived, he found no manufacturing equipment – just workers repackaging products marked “Made in China” into packaging marked “Made in Mexico.” The compliance professional took immediate action and collaborated with the supplier and the procurement team to fix the issue, but at significant cost to both parties and with a negative impact on inventory levels in the near term.
Approaches such as this are very unlikely to survive U.S. Customs scrutiny, long term.
Q: Is the issue of forced labor related to friendshoring?
It’s part of it. Companies want to protect their brands. The issue of forced labor has become a lightning rod issue for corporate CSR departments. No one wants to become front-page news when their Vietnam made t-shirts were found to use cotton sourced in China’s Xinjiang Uyghur Autonomous Region.
You can shift production locations, but you can’t hide from your supply chain.
Q: Is it possible to shift production as part of a friendshoring strategy and avoid scrutiny?
You might fly under the radar for a bit. But sidestepping compliance regulations is not a great long-term strategy for any importer, regardless of the country.
In the U.S., Customs and Border Protection (CBP) has invested significantly in AI technology that lets them parse through huge quantities of data. For instance, they can scour thousands of manifests in seconds and flag anomalies, or spot a small-print reference on page 274 of a legal document that establishes a connection between a China company and an otherwise unreported Vietnam subsidiary.
With today’s technology, it’s hard to hide.
Q: Is the logistics team involved early in planning for a friendshoring strategy?
Very often they are not, even though a friendshoring strategy creates a need for new shipping lanes, new carriers, and logistics expertise in new markets.
You want ” tariff-friendly” supply chains, but they need to be reliable from a shipping perspective. Too often, companies hastily pursue friendshoring to avoid higher tariffs and the logistics team is left to assess the implications and adjust. Dimerco writes about this in its eBook: The Logistics of China Plus One.
Q: What can and should logistics and trade compliance people do as their companies assess a friendshoring strategy?
First, they should send up a flare. Write an e-mail alerting the supply chain strategy leaders that sourcing and production changes have broad implications that require time to examine. You don’t want to avoid USD $8 million in duty payments only to give half of it back through an inefficient and unreliable logistics operation.
If better internal collaboration gets you some added planning time, that’s great. Otherwise, the only choice is to roll up your sleeves and get to work. Friendshoring has become big business. Logistics professionals are in the cross hairs of this trend – whether they like it or not.
Karen Kenney, who consults with Dimerco, is President of supply chain advisory firm, K2 Trade Solutions. If you’d like to discuss the logistics and compliance implications of a friendshoring strategy at your company, contact the global shipping experts at Dimerco to start a conversation.
