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Vietnam's Prime Minister Pham Minh Chinh meets with Singapore's Prime Minister Lee Hsien Loong at the Istana in Singapore February 9, 2023.
Friendshoring and the curious case of Vietnam
Post-Davos, another of the big trends we will be watching this year is the expansion of the “friendshoring” phenomenon that has seen a significant rise in the political proximity of trade (and a shift away from geopolitical rivals).
Trade between the US and China is still rising in absolute terms, but Beijing’s share of exports to the US has fallen 7.2% since 2017. Other countries like Mexico and Canada are hoping to pick up some scraps, based on trade agreements and being nestled next to the US border. Canadian Deputy Prime Minister Chrystia Freeland was in Davos making a pitch for new investment, based on Canada’s critical mineral resources and clean energy supply (not to mention, $88 billion in investment subsidies to compete with the US Inflation Reduction Act).
There are signs that such blunt industrial policy is working. An MIT clean investment monitor for Q3 2023 suggested that there was a 42% year-on-year increase to $64 billion in US investment in clean technology – from manufacturing (mainly the EV supply chain) to retail purchases. The billions available to businesses and consumers through the IRA is likely to have played a big role in ensuring that money did not go overseas.
But there is one beneficiary of the friendshoring phenomenon that is not relying solely on its checkbook: Vietnam. The Southeast Asian country is curious in many ways, not least because it remains a Marxist-Leninist one-party socialist republic.
Prime Minister Pham Minh Chinh was in Davos to explain how he squares his country’s socialist principles with hard-bitten capitalist competition for investment. He said the goal is to develop a “socialist-oriented market economy” based on supply and demand, but where the state is present to accommodate “unpredictable” events like COVID. Vietnam is seeking to become a modern, developed, high-income country by 2050, he said, and it has come a long way already since the late 1980s. GDP growth was 4.7% last year and is forecast to be 5.8% in 2024.
Vietnam has managed to juggle relations with the US, its former enemy, and China, which lays claim to parts of the South China Sea currently controlled by Hanoi.
China remains its biggest trading partner, and two-thirds of its manufacturing inputs are reliant on imports from Beijing.
But Vietnam has seen its foreign direct investment soar, as it has positioned itself as an option for Western businesses looking to hedge away from China. Typically, manufacturing wages are around half that paid in China. Pham said his priorities now are to raise education standards to foster advanced manufacturing in semiconductors, AI, and green technology.
He said the chairman and CEO of US tech giant, Nvidia Corporation (Jen-Hsun Huang), visited Vietnam recently and said he plans to make it his company’s second home.
“We always stand ready to facilitate investment,” said the ostensibly communist leader.
Lenin will be whirling in his mausoleum.
PM Justin Trudeau visits Canadian troops in Latvia.
What We’re Watching: Trudeau’s 2% trouble, media giants and their final tweets, friendshoring promise vs. reality
Trudeau’s defense spending
Canadian PM Justin Trudeau has privately told NATO officials that Canada will never meet the alliance’s target of 2% of GDP on military spending, the Washington Post reported Wednesday. The revelation is based on a US intelligence document leaked on the Discord gaming app, allegedly by a 21-year-old intelligence staffer.
The document says NATO allies — particularly Germany and Turkey — are irritated by Canada’s reluctance to increase defense spending and its inability to fulfill commitments to the alliance. “Widespread defense shortfalls hinder Canadian capabilities,” the document said, “while straining partner relationships and alliance contributions.”
Earlier this week, dozens of former top Canadian security officials, military commanders, and politicians released an open letter calling on Trudeau’s government to take national security and defense more seriously. Canada’s defense department pushed back, saying that it just agreed to spend $19 billion on 88 F-35 fighter jets and that it’s investing in modernizing NORAD capabilities and increasing its footprint in the Canadian-led NATO battle group in Latvia.
The Liberals argue that they have increased defense spending, and the Parliamentary Budget Watchdog, an independent office, confirms that nominal Canadian defense spending grew by 67% between 2014 and 2021, and Canadian outlays as a share of GDP rose by roughly 40% – from 1.0% of GDP in 2014 to 1.4% of GDP in 2021.
That’s still well shy of the 2% goal, but even annoyed allies are behind. While Germany promises to reach the 2% goal, they too are currently at about 1.4% of GDP, and the war is on their doorstep. The US, for its part, leads NATO’s defense spending at 3.47% of GDP. With war raging in Ukraine and tensions rising with China, NATO chief Jens Stoltenberg has said the 2% target should be the floor, not the ceiling.
But domestic politics always drives the appetite for doing more. Increasing Canada’s defense spending has never been a political winner or a political necessity for any party, right or left, as the unstated assumption has always been that “the US will carry the weight.” Fighting wars may be part of the future, but fighting against inflation and for health care dollars are also security issues for politicians — job security that is.
CBC, NPR & PBS fly the coop
Elon Musk ruffled some feathers with new Twitter labels for public broadcasters on both sides of the border this month – and there are implications for the future of his platform and the media outlets.
It started when Musk decided that NPR’s Twitter account should be labeled “State-affiliated media,” as if it was an official mouthpiece for the U.S. government, like China’s Xinhua News Agency. Musk relented and changed NPR’s label to “Government-funded media,” but NPR stopped tweeting in protest. PBS followed NPR’s lead.
Meanwhile, in Canada, Conservative Leader Pierre Poilievre, who wants to end Ottawa’s massive subsidy to the Canadian Broadcasting Corporation, asked Musk to slap a new label on CBC’s Twitter account and celebrated when he did. CBC, like NPR and PBS, has hit the pause button on its Twitter account. Musk responded by changing the label to “69% Government-funded media,” a juvenile joke.
The Twitter chief seems happy to drive content producers away from his platform, so expect more of the same. Even Swedish public radio has taken its leave – not because of a label, but because its audience left Twitter first.
Friendshoring or friend-ignoring
Canadian Finance Minister Chrystia Freeland delivered a speech in Washington last week calling for “friendshoring,” or trade policy that centers on economic cooperation between like-minded countries, particularly Canada and the US.
In her budget this month, meanwhile, Freeland unveiled targeted stimulus programs that aim to keep Canadian clean tech firms from heading south to take advantage of the massive tax credits available in Joe Biden’s Inflation Reduction Act. Nobody knows yet if the Canadian budgetary measures will do what is necessary to stop capital flight, and Canadians are nervous.
Freeland gave her speech as the World Bank and IMF held their spring meetings, but an important part of her message seemed to be targeted at U.S. leaders: “No single country – not even the United States – can invent all of the new technologies, or possess all of the natural resources, that the net-zero global economy requires,” she said.
US Treasury Secretary Janet Yellen spoke last year about friendshoring and the need for “trusted trade partners” to work together to bolster supply chains. But Washington’s industrial policies and subsidies make it hard to know whether Yellen or Freeland’s message will convince American decision-makers to include Canada in its plans for a clean tech future.
“How this plays out,” writes The Globe’s David Parkinson, “will say a lot about whether friendshoring is a realistic path for global trade. Or, alternatively, expose it as a well-meaning step on a slippery slope to a more protectionist future.”
U.S. President Joe Biden speaks with Canada's Prime Minister Justin Trudeau as they meet during the Ninth Summit of the Americas in Los Angeles, California, U.S., June 9, 2022.
US green subsidies pushback to dominate Biden's Canada trip
As Ottawa prepares for a two-day visit by President Joe Biden starting Thursday, Canadians have been speculating about whether he will do something to stop the northward flow of border crossings by undocumented migrants at Roxham Road, Quebec.
That problem is grabbing headlines, but it is nothing next to the border challenges the Americans face, and the Canadians likely have more important requests for Biden. Behind the scenes, the government is focused on getting Americans to help mitigate the impact of the Inflation Reduction Act, the largest climate spending package in US history, which could lead to the loss of capital and jobs from Canada.
The $350 billion IRA stimulus package is a challenge to both Canada and Europe, with subsidies and open-ended tax credits that offer huge savings to clean-technology companies that shift their operations to the United States. It is expected to be a game-changer for emission reductions, but also a threat to allied countries who can’t match the Americans’ spending power.
European Commission President Ursula von der Leyen was in Washington this month to try to come to terms with the Americans over the nature of the threat, and the EU appears poised to match American incentives. That will come too late to save a Volkswagen battery plant that had been planned for Eastern Europe.
Not coincidentally, the German auto giant just announced plans to build a battery plant in St. Thomas, Ontario, where it can benefit from American subsidies because the auto industry is covered by the United States-Mexico-Canada Agreement. That looks like a big win for Canada, but … other sectors do not enjoy the same protection, which means that companies – Canadian and foreign firms in Canada in the manufacturing, green energy, and petroleum sectors – may be tempted to move south of the border to take advantage of generous tax credits.
Canada can’t afford to woo these businesses in the same way, so it needs to match US subsidies in key sectors while also asking the Americans, very politely, to play nice.
“The IRA is the biggest piece of industrial policy coming out of the United States for a very long time, and everybody else is now adjusting to that, and [Canadians] are distinctly exposed,” says Graeme Thompson, a Eurasia Group senior analyst. “All gears are firing in Ottawa to manage the challenge that poses to competitiveness so that the US doesn't just suck up all of the investments that we'd otherwise be after.”
That task is front of mind for Canadian Finance Minister Chrystia Freeland, who will present her third budget four days after Biden leaves. Prime Minister Justin Trudeau’s government likely sees the two events as a one-two punch, an opportunity to wrest control of the headlines for a few days.
Biden’s visit gives Trudeau an opportunity for positive messaging. For Gerald Butts, vice chairman of Eurasia Group and former principal secretary to Trudeau, the government likely hopes to change the channel from the China election interference story, which has dominated the news in Canada for weeks.
“They've clearly got a bunch of stuff lined up where they want to make some announcements there and then run into the budget,” he says. “I think what they're hoping to do, obviously, is get control back of the communications agenda from this crazy China stuff.”
So it’s clear what Biden can do to help Canada. But what can Canada do for him?
Freeland has previously promoted US Treasury Secretary Janet Yellen’s notion of “friendshoring,” building supply chains in allied economies. Her exact plans remain unknown, but Canada can offer the Americans access to critical minerals vital to green energy — like lithium and copper — and take steps to streamline approval for mining projects, although Indigenous land rights may make it impossible to go as quickly as industry would like.
Biden is also seeking more help in Ukraine and Haiti. The US wants Ottawa to play a lead role in planning for Ukraine’s reconstruction, which is reasonable. But nobody thinks Canada will do what Biden wants and put peacekeepers on the ground in Haiti, where gangs have turned the national capital into a hellscape. On the other hand, a lack of action will likely lead to even more desperate migrants heading north – a political problem for both governments, which brings us full circle to migration.
Trudeau wants the US to renegotiate the terms of the Safe Third Country Agreement, which requires that asylum-seekers who cross select parts of the US-Canada 5,525-mile border be sent back to the country where they first entered. Trouble is, this encourages migrants to enter at irregular crossings, such as Roxham Road, and once they’re in Canada, they can legally make asylum claims. The Americans have been noncommittal, and they point to uncontrolled irregular crossings in the other direction: Mexicans who can fly into Canada without a visa and then make a short river crossing to the United States.
From the US perspective, Canada is not doing its part, says Christopher Sands, director of the Wilson Center’s Canada Institute.
“We have problems on both our borders,” he says. “You think your border's better, but we both have illegal crossers and we are just as mad about all of them. You're not any better than the Mexicans. We should get better co-operation from you. It's been one of those debates.”
Biden isn’t likely to renegotiate the STCA unless Canada agrees to do more to control the traffic going the other way, and maybe agrees to take more migrants from Central America.
“I think it's gonna be very tough for the president to do much when he's in Canada,” Sands says.
On the other hand, Trudeau and Biden are progressive political allies, and both are struggling with lackluster approval ratings, so they may want to make some deals and show progress on issues that matter on the ground to voters in both countries.
Fun fact: Biden is the first president to spend a night in Ottawa since George W. Bush came north to thank Canada for its help after 9/11. He’s likely not spending so much time — a precious commodity for the world’s most powerful man — without intending to do something that matters.
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Can you get by with a little help from your friends?
The pandemic inflicted a huge shock on supply chains, but there is another force at work remapping global trade flows too: the deepening ideological divide between the US and China, framed in Washington as a broader competition between democracies and autocracies.
The so-called “de-coupling” between the world’s two largest economies began during the presidency of Donald Trump, who slapped tariffs on China in a largely unsuccessful attempt to address the real harms that offshoring has done to some US workers.
US Treasury Secretary Janet Yellen recently touted the benefits of so-called “friendshoring” on a visit to South Korea, which is trying to lure American supply chains away from China and to start making more microchips itself. Southeast Asian manufacturing powerhouses like Malaysia, Vietnam, Thailand, and Indonesia are also keen to continue capitalizing as “friends” of the US.
Friendshoring may offer certain protections in a world of deepening ideological competition, but there are tradeoffs: “friendly” countries may not always produce goods as cheaply or efficiently, meaning that consumers may have to accept higher prices, particularly in the short term. Is the tradeoff of greater security in exchange for less efficiency worth it? More to the point, is it now unavoidable?