For years, European and US companies have embedded Russia ever more deeply into their supply chains. With many nations now weighing the costs of their exposure to the autocratic state, a trend of ‘friend-shoring’ could soon overhaul trade as we know it. Felix Thompson reports.


In a report published in the months following the Russian invasion of Ukraine, the World Trade Organization (WTO) laid out the potentially devastating impact of the war and retaliatory US and Europe-led sanctions on western supply chains.

As outlined in the analysis, published in April, Russia and Ukraine are “key providers” of inputs into industrial value chains, particularly for automotive manufacturing, despite their overall small share in global trade.

Russia is a major supplier of rhodium and the largest producer of palladium, fulfilling about a quarter of worldwide palladium demand and roughly 45% of demand in the US and Japan, in 2019. Both metals are crucial in making catalytic converters.

As war broke out, the world’s carmakers had only just started recovering from a global semiconductor shortage that emerged in mid-2020. The WTO report warns disrupted supply of these commodities – as well as Ukrainian neon used in the lasers that carve out semiconductors – could dent this revival.

Russia occupies a similarly substantial role in aerospace supply chains, with the aviation industry remaining heavily reliant on the country’s supply of titanium, though China is the world’s biggest producer of the metal.

“Titanium is particularly important for commercial jet engines and other airplane parts,” US law firm Steptoe says in a May analysis.

The firm outlines that Airbus turned to Russia for half its titanium requirements prior to the outset of the Ukraine invasion, while the Russian metals company VSMPO-AVISMA accounted for about a third of Boeing’s titanium needs.

Although sanctions do not currently cover titanium trade flows, there is a chance that either side may escalate measures, leading to a restriction of supply for aviation companies. At the same time, the likes of Boeing and Airbus are grappling with rising titanium costs, with Trading Economics data showing the price of the metal soaring more than 90% over the past 12 months.

Against this backdrop, Airbus CEO Guillaume Faury reportedly said at an annual shareholder meeting in April that the firm would ramp up a search for non-Russian supplies in the long term.

More widely, across varying sectors and geographies, there are signs that corporates will increasingly adopt a “dual sourcing” approach, accelerating a trend that had already been growing in the wake of US China trade tensions and the Covid-19 pandemic.

In a June 2021 survey of supply chain managers run by consultancy firm McKinsey, 60% of respondents said they had increased inventories of critical products, with a slightly smaller number having moved to dual sourcing of raw materials.

In a follow-up questionnaire held in the weeks after the Russian invasion, that number had shot up, with 80% of respondents saying they had implemented dual sourcing since March.

“Dual sourcing is set to become even more important, in light of the war,” says McKinsey in a report from May this year. “Russian exports represent about 2% of the US$19tn in annual global trade, but much higher portions of some key commodities – base metals… and energy sources, fats and oils, cereals, and wood products, among others.”

Nevertheless, it notes that finding new sources of raw materials will be “particularly difficult” for industries whose supplies are currently concentrated in specific markets.



Experts suggest that in the coming decade, European and US-headquartered companies could take more radical action and, where possible, seek to cut ties with suppliers located in ‘unfriendly’ countries. For many, the risk of doing business with autocracies may be too great.

In its April report, WTO economists simulated various scenarios exploring the potential short and long-term effects of the Ukraine crisis. They projected global trade growth could slow by up to 2.2% in 2022, but warned the eventual impact could 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%, notably by restricting competition and stifling innovation,” it says.

In this hypothetical future, the WTO says two separate economic blocs could emerge over the next 10 to 20-year period, with each trading region levying high tariffs on one another, while also lowering tariffs for partners within these areas.

The outcome would be costly for all economies: the WTO predicts Russia would lose about 10% of GDP growth from baseline projections, China about 7%, India 9% and the EU and Japan about 4%.

Despite such warnings, policymakers on both sides of the Atlantic have started touting the need to boost supply chain resilience by shifting trade away from ideological foes, such as Russia and China, in a trend referred to as friend-shoring.

This concept has been described by US treasury secretary Janet Yellen as a commitment to work with countries that “have strong adherence to a set of norms and values about how to operate in the global economy and… run the global economic system”.

Neither Russia nor China have shown willingness to adopt a western democratic model, with the Economist Intelligence Unit’s Democracy Index, which provides a detailed analysis of democratic functioning in 165 countries and territories globally, listing both as “authoritarian”.

Moscow and Beijing have both been criticised for undermining electoral processes, pluralism and a range of civil liberties, not least freedom of press, freedom of assembly and equal treatment under law.

“The war may prove to be a tipping point for Europe and other regions too, making the alliances to which suppliers’ countries belong more important,” said Christine Lagarde, president of the European Central Bank, at a speech in Washington DC in April.

“International firms will still face strong incentives to organise production where costs are lowest, but geopolitical imperatives might restrict the perimeter in which they can do so.”

Over the last couple of years, the EU and US have been pushing to reshore supply chains for strategic sectors, with both having pledged to pump tens of billions of dollars into incentivising semiconductor manufacturers to build factories on home soil.

But according to Lagarde, “even industries that are not considered strategic are likely to anticipate the fracturing of the global trading order and adjust production themselves”.


China impact

Over the decades, China has been a major beneficiary of modern globalisation. But the Asian giant’s role in global supply chains has been facing geopolitical pressures that predate the pandemic and the war.

Ongoing US-China trade tensions have encouraged a growing number of western businesses to adopt a so-called China plus one approach and strike supply deals with, or move manufacturing to, nearby countries, such as Taiwan or Vietnam, to diversify their sources and counter concentrations risks.

But analysts suggest the Ukraine crisis will force many business leaders to further assess their appetite for investment in China, given the prospect of a stand-off between Beijing and Washington over Taiwan.

China’s President Xi Jinping claims Taiwan is a breakaway province and has said reunification with the mainland “must be fulfilled”, while US President Joe Biden has warned he would be willing to use force to defend the island nation.

“European companies are putting future investment on hold and looking at other places. CEOs are flying to Indonesia, Singapore, Malaysia, Thailand and India, or considering putting their operations closer to the European market,” Joerg Wuttke, president of the EU Chamber of Commerce in China, tells GTR.

He attributes this trend to a variety of factors hampering business conditions in China, including Beijing’s zero-tolerance approach to Covid-19 – causing chaos at Chinese ports – as well as a poor regulatory environment.

Although the impact varies across different sectors, European firms that engage in trade with China cite numerous regulatory hurdles, including burdensome customs procedures, licensing requirements and data localisation policies that limit the types of data firms can transfer across borders.

Wuttke also points to growing geopolitical risks and public scrutiny of forced labour in China’s northwest Xinjiang region as further reasons why corporates are contemplating moving their operations elsewhere.

“The world is dividing into ‘us’ versus ‘them’. Companies are considering who the ‘friendly countries’ are and looking for good investment opportunities in these places,” he says. “In the old days they just looked for the best location and put money in.”

A flash survey run in April by the EU Chamber of Commerce in China found investor confidence in the country to have been hit by the Ukraine war, with 7% of EU firms considering moving current or planned investments out of China and 33% viewing the market as having become less attractive as an investment destination.

Jeffrey Weiss, a partner at law firm Steptoe, argues the US and EU will use a “variety of measures” to promote friend-shoring to corporates, including policies aimed at reducing imports from heavily polluting countries, or those suspected of deploying forced labour.

“Environmental measures are origin neutral and can discriminate against jurisdictions that are not taking strong enough action on climate change,” says Weiss.

“If some of those countries just so happen to be autocracies, it has a beneficial side effect.

“[Countries] could also focus supply chain due diligence measures towards cyber security, which again are origin neutral, and are going to be difficult for certain jurisdiction to comply with – as well as forced labour.

We are already seeing that with the Uyghur Forced Labour Prevention Act (UFLPA).”

The UFLPA, which came into effect on June 21, has created a “rebuttable presumption” that goods produced either wholly or in part in Xinjiang were made through the use of forced labour.

In effect, the onus is now on US companies to prove that a product with any Xinjiang-related component or input has not been produced using such practices.


Concentration risk

While Washington and Brussels may have designs on their domestic companies slashing their supply chain exposure to autocracies such as Russia or China, it remains unclear how likely an outcome this might be.

In May, UK-based non-profit think tank Planet Tracker published research revealing the unhealthy reliance of many countries on non-democratic states for so-called “natural capital” imports.

Natural capital is broadly defined as the world’s stocks of natural assets, which include geology, soil, air, water and all living things. It can be broken into renewable sources, such as crops, meat, dairy and seafood, and non-renewables, including fossil fuels and metals.

Planet Tracker analysts examined export data from countries and territories globally, and using the UN Comtrade goods categorisation system, decided whether or not exports were nature dependent.

Researchers then sought to classify exporters as non-democratic or democratic, by using the Economist Intelligence Unit’s Democracy Index, which considers aspects such as electoral process and pluralism, functioning of government, political participation, political culture and civil liberties.

The findings showed that 40% of total global trade between 2010 and 2019 was derived from nature-dependent exports, with 36% of these exports originating from non-democratic countries.

Among the non-democratic countries that are most important to global trade in natural capital are Russia, which accounts for 5.4% of exports; China, at 5.3%; and Saudi Arabia, at 3.3%.

These nations are large players in non-renewable nature capital trade – that is, fossil fuels, metals and ores – representing two-thirds of all nature-dependent exports.

Cotton is another area of concern. It accounts for the largest share of trade in agricultural products by value, at an average of US$260bn over the last 10 years. It is also highly dependent on non-democratic countries, at 64%. While China accounts for 30% of cotton exports, Bangladesh, Turkey and Pakistan also hold important shares.

Given these trends, Planet Tracker research director John Willis tells GTR that the think tank expects there to be a “deeper analysis of supply chains and trade dependency by governments”, but that a complete realignment of supply chains appears unlikely in the short term.

One constraining factor is that many natural resources, notably non-renewables cannot be created. “It is the luck of the draw as to where deposits are located and friend-shoring may not be an option,” says Willis.

This means there is a lack of alternative options for many of the goods Russia and China specialise in exporting, and any drive to find new sources may simply result in the US, or Europe, building dependency elsewhere.

“By reducing the number of suppliers of a particular product – ie all authoritarian countries are excluded – concentration risk rises. In turn, this makes the importer more exposed to any potential supply disruption from a smaller number of sources, whether the disruption is intentional, such as a trade embargo, or not, for example an infrastructure failure or pandemic,” Willis tells GTR.

Still, western policymakers are hopeful they will be able to limit Russian and Chinese supply chain exposure, while also maintaining resilience against any major disruption.

Various joint-government initiatives have sprung up to boost access to critical minerals, particularly for commodities seen as strategic for the energy transition, such as copper and lithium.

Canada, for example, is developing a US$3bn package to bolster production of lithium, copper and other strategic minerals, with the US likely a main destination for future exports.

Meanwhile, the Pentagon has recently requested US lawmakers to amend the Cold War-era Defense Production Act to allow it to invest directly in mining projects in both Australia and the UK.

Semiconductors are another key area of co-operation, with the EU and US working to secure chip supply chains through the Trade and Technology Council, which hosted its first meeting in late 2021.

These efforts will take time and much political wrangling, particularly in the US, where, at the time of writing, the semiconductor industry is still awaiting the passing of a long-stalled package that would provide US$52bn towards encouraging major chip makers, such as Intel and TSMC, to build factories on American soil.

But experts say the Ukraine crisis and the threat posed to Taiwan by China will help encourage friend-shoring in the coming years. “There is an incentive to work together now, more so than in the past,” says Weiss.

“Hopefully [western governments] will be able to overcome their differences, put together a strategy that works and bring in other like-minded countries. The bigger the market share you have, the more likely you can incentivise companies to relocate their supply chains.”