Friend Shoring in Action: A profound change in global trading system.

Welcome to The Executive Perspective.

In John Steinbeck's epic novel, Of Mice and Men, Lennie says "With us it ain't like that. We got a future. We got somebody to talk to that gives a damn about us."

And Lennie finishes:

"An' why? Because...because I got you to look after me, and you got me to look after you, and that's why."

A line which best describes in my opinion the bond between persons and countries as well.

A line which also underlines the vital importance of mutual trust, a rare and priceless commodity in both personal and international relations.

What's that got to do with business?

A lot.

Because we are already heading into a new trading system which prioritizes "trust and security" over "profit maximization". In other terms, no sane administration in developed countries will knowingly let companies registered in their system develop or maintain a trade relationship with "untrusted or unfriendly nations" in the name of profit maximization, cost reduction, supply chain efficiency etc.

Why?

Because bilateral trade means countries funding each other in exchange for goods/services and money, creating also an inevitable dependency over each other in years.

So, what if a country that you helped grow economically and militarily by means of bilateral trade decides to weaponize that dependency and large sums of funds to threaten or even invade you and/or your allies? You naturally throw the mindset of profit maximization out of window and create a whole new trading system with "trusted and friendly" countries.

And that profound change marks the death of "end-to-end supply chains" scattered all over the world which are delicately built to push the boundaries of resource diversification, profit maximization, outsourcing and at the same time marks the birth of "friend-shoring", a term Janet Yellen, U.S. Secretary of the Treasury mentioned in her speech at the Atlantic Council on April 13, 2022.

Yellen in that speech explained what a friend is and why that matters for the United States and for the rest of the world with those words:

“We cannot allow countries to use their market position in key raw materials, technologies, or products to have the power to disrupt our economy or exercise unwanted geopolitical leverage. So let’s build on and deepen economic integration and the efficiencies it brings on terms that work better for American workers. And let’s do it with the countries we know we can count on. Favouring the friend-shoring of supply chains to a large number of trusted countries, so we can continue to securely extend market access, will lower the risks to our economy as well as to our trusted trade partners.”

Notice the words I underlined in her speech.

In case you are wondering, Janet Yellen mentioned only two countries during her speech — Russia and China.

She made it clear that the United States, Europe and other countries have issues “about the practices that China has that negatively impact our national security and human rights concerns.”

In other words, at this stage, Russia is an aggressor and China is not a friend.

“Friend-shoring” may sound innocuous, particularly if you are a friend of the United States and Europe, but it entails a shift in trade and money that will profoundly change the global trading system, the global monetary system and the course of the 21st Century.

All in all, I believe it has utmost importance right now for companies and boards to think about what they should be doing in "friend-shoring" going forward, with a focus on the following questions:

• Is your company prepared for the new geopolitical reality?
• What can your company do to do avoid getting caught in the swirling economic and political crossfire?
• Do you have a plan for when China supply chains and market access suddenly change overnight?
• What should you be doing now to protect your business?
• How should you be managing the potential repositioning of your business to this new reality?

I will be more than happy to assist you in your efforts to come up with a viable strategy and workflow to address these vital questions.

Let's now carry on with putting global events in perspective.

Here are the latest developments on 8 global trends that I believe will shape the way we do business in 2022.

If you would like to get a notification on new issues of?The Executive Perspective, please feel free to subscribe.

1. Management Strategy

Change Ahead: Managing the new reality of “Friend-Shoring”.

Public backlash abroad against U.S. and multinational firms operating in Russia, as well as concerns about staff safety and potential sanctions violations, have already led many foreign firms to exit the Russian market or cut ties with?Russia altogether, thereby further upending some global business operations and supply chains.

These actions may result in profit and asset losses, as well as foregone export and investment opportunities, for businesses and workers around the world.

The war’s impact on global trade has been most severe in the Black Sea region, where Russian and Ukrainian ports are major hubs for grains destined for the EU, Africa, and Asia. Some analysts have warned of shortages of—and price increases for—substitutes of certain grains and other food inputs not produced in Ukraine or Russia, as other countries try to fill the gap in imports.

The ongoing war, like the COVID-19 pandemic, has accelerated and magnified existing problems in global supply chains and emphasized the interconnected nature of the global economy.

For many, the war further highlights the importance of improving the resilience of domestic and global supply chains and potentially limiting trade dependencies on certain countries.

This new emphasis presents the United States and its allies with questions about the manner and extent to which government policy can and should alter existing production and supplier arrangements. In particular, the U.S. Congress might consider the costs and benefits of adopting policies that attempt to reallocate resources within the economy toward developing domestic production of goods currently being imported from Russia and Belarus.

Another option for policy makers would be to reinforce U.S. support for global trade arrangements and agreements with like-minded trading partners, while also encouraging “re-shoring” and “friend shoring,” and utilizing a greater diversity of foreign suppliers to increase resilience.

What do all these mean from the executive perspective?

1. Understand the change and understand it now.
2. Develop a systemic approach to assess and monitor the implications.
3. Fine-tune the strategy and implement it carefully across the spectrum.

2. Geopolitics

Taiwan on the Table: China is building the pressure on strategic island.

Last week the U.S. said China prioritizes taking over Taiwan in a peaceful manner, but also prepares for a scenario where its military could prevail even if there is intervention from the United States.

China, which recognizes Taiwan as part of its own territory, has never refused the possibility of using force for unification.

Taiwan has no diplomatic ties with the United States, like most countries, but it is the island's most important international supporter and arms supplier, despite Beijing's protests.

The U.S. thinks China is working to put itself in a position where their army is capable of taking over Taiwan even if the U.S. intervenes. It is also considered that China may be taking lessons from Russia's invasion of Ukraine and international response to it.

U.S. officials is currently with allies in the Indo-Pacific and Taiwan's leadership to understand what this conflict has been, about what lessons they can learn and where they should be focusing their funds on defense and their training.

On the other hand, The U.S. State Department website's section on relations with Taiwan has removed wording on "not supporting Taiwan independence and on acknowledging Beijing's position that Taiwan is part of China."

That is a significant shift in U.S. stance over Taiwan.

Moreover, "Taiwan hopes that the world would sanction China like it is sanctioning Russia for its war on Ukraine if Beijing invaded the island", Taiwanese Foreign Minister Joseph Wu said recently. "In the future, if we are threatened with force by China, or are invaded, of course we hope the international community can understand and support Taiwan, and sanction these kinds of aggressive behaviours" he added.

Taiwan has raised its alert level since the Ukraine war began, wary of China making a similar move, though the government in Taipei has reported no signs of an very imminent Chinese attack.

3. Manufacturing and supply chains

Xi's Choice: China's Zero-Covid policy strains global supply chains.

China's zero-covid policy causes highways and ports to become clogged and factories shut.

Production and transport disruptions in the country ripples through global supply chains for goods from electric vehicles to consumer electronics. While some factories try to get through the crisis with "closed loop" management that keeps workers isolated inside, it is hard to sustain given the government's harsh measures to wipe out the Omicron variant.

Foxconn Interconnect Technology?that makes data transmission equipment and connectors, keeps a plant open near Shanghai in a closed loop but is only able to run at 60% capacity.

More than 30 Taiwanese companies recently said Covid measures in Eastern China had forced them to suspend production until at least next week.

Bosch also announced suspension at two of its plants and put two other under closed loop operation. Taiwan's Pegatron Corp. also had to halt operations at two sites.

China's zero-tolerance approach to COVID-19, despite low case numbers and even as the rest of the world tries to live with the coronavirus, is becoming hard to manage given the extreme infectiousness of the less-deadly Omicron variant.

The zealous approach has made localized curbs extend far beyond virus hotspots Shanghai and Jilin provinces. 87 of China's 100 largest cities by GDP have imposed some form of quarantine.

Truck transport has also been hit hard as long queues and delays drive prices up. Booking a truck from Shandong to Shanghai more than quadrupled from 7,000 yuan to 30,000 yuan.

Foreign businesses raised their concerns as the European Chamber of Commerce in China sent a letter to the government last week highlighting that about half of German firms in the country were experiencing supply chain problems.

China has tried to ease the impact of the curbs by keeping ports and airports open and encouraging closed loop production. Still, the number of container vessels off Shanghai, the world's largest container port, and Zhoushan has more than doubled since the beginning of April and tripled from a year ago.

Maersk recommended clients to divert shipments from the congested Shanghai port to other Chinese ports.

Growth forecasts for the country have been cut amid disruptions. Beijing has set a 5.5% growth target for 2022.

4. Energy Security

Reorienting Energy: Can India and China save Russia's energy sector?

Western powers hit Moscow with sweeping sanctions, mostly targeting the country's financial sector. However, Russia's biggest revenue generator, its energy sector, has been largely spared so far. Other than Poland and Lithuania no EU member has announced a ban on Russian energy. The EU countries are expected to impose sanctions on Russian oil in the coming months after Russian troops' atrocities against Ukrainian civilians have been revealed.

Western officials, including U.S. Treasury Secretary Yellen, have been warning that the Ukraine War would have huge economic repercussions.

However, it is still unclear if a total ban on Russian energy commodities will be as disruptive as the West hopes on Russian economy without a secondary sanctions scheme that will also bind third parties.

As India and China continue to import oil from Russia at big discounts, a Western oil import ban may not be as damaging to the country as the U.S. and the EU calculate.

India has never been a big importer of Russian crude despite getting 80% of its needs from overseas. In the past years, India has only imported 2%-5% of its crude from Russia, with the majority coming from Iraq, Saudi Arabia, Nigeria and the United Arab Emirates. India imported only 12 million barrels of Russian crude in 2021.

However, deliveries this year show a significant uptick in Russian oil deliveries to India. Since the beginning of March, just after Russia launched its invasion on Ukraine, around 6 million barrels of Russian crude have been loaded and are bound for India. This means India has already imported half as much from Russia in one month as it did the entire 2021.

India's decision to boost imports from Russia is purely economic, as the product is offered at big discounts.

Urals crude from Russia is being offered at record discounts. Some commodity trading firms have been offering $25-$30 discounts per barrel two weeks ago for the Urals blend, the main export blend of Russia.

Although the U.S. has been urging Delhi to cut Russian imports, discounts are too good to resist for oil hungry India and Modi likes opportunities.

While India's decision is economic, it does not mean that India and Russia have not developed close relations in recent years. Russia provides around 60% of India's military and defense related equipment. Moscow has also been an ally of Delhi on key strategic issues such as India's dispute with China and Pakistan over the territory of Kashmir.

India might not be the only big buyer of Russian crude.

China, with its experience with evading sanctions, could line up to buy some of those cheap Urals crude. Over the years, it has been reported that China buys Iranian crude under wraps. Moreover, China is already Russia's biggest oil customer with an average of 1.72 mb per day in 2021.

Nevertheless, China's crude imports from Russia has declined in the first two months of the year by 9.1% to 1.57 mb per day. But this has less to do with China being reluctant to buy because of sanctions and more with the country's regulatory crackdown on smaller independent refiners, also known as teapots.

Back in June last year, China has cut import quotas of the country's private refiners. China's independent refiners were granted a combined 35.24 million tons in crude oil import quotas in the second batch of quotas this year, a 35% reduction from 53.88 million tons for a similar tranche a year ago.

The government crackdown on teapots came after they have become dominant in the market over the past five years. Beijing aims to more precisely regulate the flow of foreign oil as it doubles down on malpractices such as tax evasion, fuel smuggling, and violations of environmental and emissions rules by independent refiners. The teapots have been grabbing market share from the state's big firms Such as Sinopec and PetroChina Co. ever since Beijing partially liberalized its oil industry in 2015. Teapots currently control nearly 30% of China's crude refining volumes, up from 10% in 2013.

Still, China may not want the opportunity to buy crude at big discounts go to waste.

Eastern Siberia Pacific Ocean (ESPO) pipeline could become crucial for Russia if flows through Yamal and Druzhba are halted. Both connect Russian gas and oil fields to Europe.

Good news for the West is that purchase of discounted Russian oil is still limited. Asian oil importers have so far continued to buy from traditional suppliers in the Middle East, Latina America and Africa. Moreover, Russia will still struggle to fill the gap left by a ban on imports from the West. It is estimated that as much as 3 million barrels of Russian oil will be shut in starting from April. Commodity analysts say it could take years for Russia's vast energy sector to fully recover.

5. Legislation

Weaponizing the Trade: China is resolute on imposing export controls to dual-use items.

China accelerates effort to impose export controls to products that can have military applications. Beijing will require exporters of such products to provide documentation of the intended use by the buyers in an effort to halt the militarization of sensitive technology. However, concerns remain that Beijing could use the process arbitrarily against countries that it has poor diplomatic relations.

Last month, China's Ministry of Commerce solicited regulations on export control of dual-use items after more than a year since the country enacted the Export Control Law in December 2020. The law authorizes the government to take action against any country that abuses export control measures and poses a threat to China's national security.

The new regulations emphasize that the dual-use items, products that both have civil and military use, should follow the national security concept. The government intends to implement control lists and export licenses while supervising and inspecting the exports in accordance with the law. The validity period of a general license should be not longer than two years, which will be followed with a reassessment before the expiration.

In response to the unauthorized export of dual-use items, the new regulations further clarify the degree of punishment, including the confiscation of illegal gains.

If the illegal business volume is more than 500,000 yuan ($77,000), a fine of five to 10 times the illegal business volume shall be imposed concurrently. If the amount of illegal business volume is less than 500,000 yuan, a fine of not less than 500,000 yuan but not more than 5 million yuan shall be imposed.

Before the Export Control Law (ECL) took effect, export controls were scattered across several laws and regulations and lacked a unified regulatory system. The ECL establishes the regulatory framework for export control and defines the controlled items subject to export control. For foreign companies, specifically engaged in import and export trade or related business, the ECL may require changes to export licenses, administration, and procedures.

Other than dual-use items; military products including equipment, special production facilities and other related goods, technologies, and services utilized for military purposes as well as nuclear materials, including nuclear equipment, non-nuclear materials used for nuclear reactors, and related technologies and services are also included in the ECL.

6. Sustainability Strategy and Decarbonization

Hydrogen Hype: Rotterdam Port triples hydrogen delivery forecast.

Rotterdam, Europe's biggest port, has tripled its estimate for the amount of green hydrogen it expects?to deliver to northwest Europe each year by 2030.

Green hydrogen produced from renewable sources is expected to play a major part in Europe's attempts to cut greenhouse gas emissions.

The port announced recently that based on current plans and projects by companies in the port area and exporting countries, it could deliver 4.6 million tonnes of hydrogen per year by 2030, a three fold hike from the previous estimate.

Most of the increase is expected to come from imports, which could reach 4 million tonnes by 2030, with local production at around 600,000 tonnes, according to the plans. Import and production would be a combination of green hydrogen and blue hydrogen, which is made from natural gas in a process where CO2 emissions are captured and stored.

Currently, no green or blue hydrogen is imported into Rotterdam. The port's previous estimate for 2030 was to reach 1.5 million tonnes of sustainable hydrogen. Hydrogen in Rotterdam is currently only derived from gas in a process that creates considerable CO2 emissions.

Hydrogen is seen as a cleaner alternative to natural gas as energy and a raw material. The EU bets big on green hydrogen in the transition to cleaner energy.

EU Climate Policy Chief Timmermans said the bloc aims to produce 10 million tonnes of green hydrogen an import another 10 million by 2030. The challenge for green hydrogen is the need for governments to ensure its price to go lower than fossil fuels.

Timmermans also said that the European Commission will next week propose a widespread rollout of CO2 "contracts for difference" plans to address this issue and support green hydrogen projects. The EU also set to propose regulations to define what types of hydrogen count as green. It is needed in particular for imported hydrogen to be accepted as green.

Europe already uses hydrogen in some industrial processes, but 90% of that is currently produced from gas in a process that emits CO2.

7. Mining and Metals

Skyrocketing: Energy transition efforts will keep demand for metals high.

The World Bank reported on Thursday that both demand and prices for metals are forecast to increase in the coming years due to the global energy transition.

Global commodity markets were reshaped as a result of the COVID-19 pandemic, the war in Ukraine, and the effects of climate change, the bank said in its latest report, while warning that these changes could have profound effects on developing economies.

Demand for some commodities is likely to increase but growth in overall global demand for commodities is expected to slow as population growth slows and emerging economies mature, the report said.

The bank acknowledged that the transition to cleaner energy could be challenging, with the demand for metals needed to build renewable energy infrastructure and produce electric vehicles likely to increase in the coming years. This transition, in turn, will raise the prices of metals while providing unexpected gains for exporting countries.

Prices of these metals may remain high in the long term but will depend on the speed of the energy transition, the volume of mining capital investment, environmental constraints on these industries, and policy measures and incentives.

The critical metals in the energy transition include; red metal, copper, and aluminum used in wind turbines, solar panels, grid connections, electric vehicles, and charging infrastructure. Steel alloys such as chrome and iron ore, battery metals such as nickel, lithium, and cobalt, as well as rare earth and aluminum alloys and platinum group metals are considered other crucial metals.

The report said that although renewable energy is fast becoming the lowest-cost energy source in many countries, fossil fuels will remain "attractive", especially in countries with ample local reserves.

The report noted that an organization similar to the International Energy Agency, focusing on metals and minerals, should be established to assist data collection and analysis, and encourage policymakers to provide a favorable policy environment for adequate investment in metals production to avoid future deficits.

8. Defense and Armament

Tackling China: Pentagon proposes NDAA amendment for Australia, UK rare earths funding.

The U.S. Department of Defense has asked Congress for authorization to fund strategic mineral facilities in the UK and Australia.

The Pentagon calls the proposal crucial to national defense since those minerals are crucial for weapons manufacturing as well as electric vehicles (EVs).

Pentagon's request to alter the Cold War-era Defense Production Act (DPA) came as part of its recommendations to Congress for how to write the upcoming US military funding bill, the National Defense Authorization Act (NDAA).

Congress will decide whether to accept or reject the proposal when it finalizes the bill later this year.

The U.S. has accelerated efforts to wean off dependence on China for lithium, rare earths and other minerals that are used to make a range of technologies including weaponry. Existing law bars DPA funds from being used to dig new mines, but they can be used for processing equipment, feasibility studies and upgrades to existing facilities. Currently, only the U.S. and Canada facilities are eligible for DPA funding.

The Pentagon argues that by adding Australia and the United Kingdom, the U.S. could leverage the resources of its closest allies to enrich US manufacturing and industrial base capabilities and increase the nation’s advantage in an environment of great competition.

The Department of Defense also says limiting the DPA only to domestic or Canadian sources unnecessarily constraints strengthening an industrial base.

The U.K. refines nickel and has several proposed processing facilities for lithium and rare earths. Australia has mining and processing facilities for a range of minerals, including iron ore, lithium, copper and rare earths, a group of 17 metals used to make magnets that turn electricity into motion.

The Pentagon last year awarded a DPA grant worth $30.4 million to Australia-based Lynas Rare Earths to build a processing facility in Texas with privately held Blue Line Corp. Lynas said last month that these funds have not been dispersed yet. The company cites ongoing negotiations over protection of its intellectual property as the issue.

The Pentagon has also granted at least $45 million to MP Materials, which controls the only US rare earths mine but depends on China for processing. The funds are to help MP’s efforts to resume US processing of those strategic minerals. The company said last week that it has started receiving those funds while confirming that the Pentagon will have certain rights to technical data because of its financial support.?

That's all from this edition of The Executive Perspective.

Hope to see you again in the next edition.