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Yellen hero
• Jun 23, 2022

On her first visit to Canada as United States Treasury Secretary earlier this week, Janet Yellen met with Canadian Finance Minister and Deputy Prime Minister Chrystia Freeland to discuss a range of economic issues facing the two trading partners.

Amid a full day of private discussions and closed-door bilateral talks, the two leaders participated in a public armchair discussion hosted by Canada 2020 at the Rotman School of Management and moderated by TD Chief Economist Beata Caranci.

Billed as "Economies that Work for Everyone," the discussion touched on a range of international issues, from the conflict in Ukraine, to tackling income inequality, to workforce participation and the continued impacts of the COVID-19 pandemic.

A recurring theme for the conversation is what Caranci described as the "connecting points" of this longstanding partnership.

"The Deputy Prime Minister and I … quickly learned that we share many things in common in terms of our values: our focus on work, on jobs, on strong growth and a fair, equitable and sustainable economy," said Secretary Yellen, a sentiment frequently echoed by Minister Freeland.

"I took a lot of inspiration from [a recent speech by Secretary Yellen] as we were putting together our budget, partly because I had this flash of self-recognition and I felt that she gave a name to some policies we had been pursuing in Canada since 2015," Minister Freeland said.

When considering the global challenges facing the two countries today, including the interconnected issues of inflation, supply chain management, and Russia's illegal invasion of Ukraine, the two leaders promoted the notion of pursuing a values-first approach to the necessary reordering of global trade in the wake of these crises – what has come to be known as "Friend-Shoring."

"Friend-shoring" and a new approach to helping solve global supply issues

According to TD Economics, friend-shoring is an economic strategy of the U.S. administration that was already proposed prior to Russia initiating its illegal conflict, and has since gained more popularity. The notion of friend-shoring between two nations focuses on allyship built on shared values to establish new supply routes for key products, such as energy.

Instead of outsourcing or "offshoring" the production of certain industries by certain countries, friend-shoring sees like-minded nations reclaim those industries. During the discussion, Minister Freeland identified several industries where Canada would consider friend-shoring, including natural resources, critical minerals, energy, fertilizer, and nuclear material.

Minister Freeland said friend-shoring is a way of diversifying trading relationships to cut in allies who can be trusted to promote democracy and human rights, and cutting out those less-trusted.

Secretary Yellen noted that the pandemic highlighted what she describes as the brittle nature of U.S. supply chains, which were only exacerbated by the war in Ukraine, saying friend-shoring is "a term that is sensible to building greater resiliency."

But Minister Freeland took it a step further, noting that with the illegal invasion of Ukraine, the era of mutual participation of nations in global trade that began in the late 1980s has ended.

"This is going to be the big economic and geopolitical issue that we [the international community] are going to be debating and tackling," said Minister Freeland.

"That era is over, and so we need to figure out what replaces it and I think what replaces it is, first of all, friend-shoring where we deepen our ties between the countries who share values – the countries that really can trust each other."

For those wishing to bolster Canada's role in the global economy, friend-shoring makes sense as a strategy when your closest friend also happens to be the world's biggest economic powerhouse, but it is a strategy that has its detractors, said Caranci, Chief Economist at TD Economics.

The counterargument among some economists, Caranci notes, is that forming antagonistic camps of trading partners has the potential to worsen inflation and hurt global economic growth.

For Minister Freeland, the potential negatives of friend-shoring are outweighed by the positives in new trading relationships that can bolster demand for Canada's natural resources, including minerals necessary for batteries and semiconductors, which have been caught up in supply challenges that even predate the pandemic.

"Guess who has most of this stuff: We do. Canada does," said Minister Freeland.

Secretary Yellen on the other hand, positioned friend-shoring as a way to secure and complement existing trade relationships, while expressing caution for protectionist sentiments that may arise amid increased distrust of trading partners.

"Countries that espouse a common set of values … should trade and get the benefits of trade so we have multiple sources of supply and are not reliant excessively on sourcing critical goods from countries especially where we have geopolitical concerns," she said.

Janet Yellen (L) and Beata Caranci (R)

Ending the reliance on Russia and China

For Secretary Yellen, the reorganization of supply chains provides alternatives and checks to those not acting in good faith.

While Minister Freeland reiterated her call to base trade relationships on mutual understandings of democracy and human rights, she said she also sees the opportunity for Canada.

"I have a call to action to Canadians in this age of friend-shoring," said Minister Freeland near the conclusion of the discussion.

"The world's democracies do not want to depend on Russia and China for the critical minerals and metals it takes to build electric batteries or semiconductors or to power nuclear reactors or to create fertilizer or for even sources of energy. That is just not safe anymore… We [Canada] owe it to our allies as good partners to really step up."

Following the event, Caranci noted how the conversation highlighted the strength of the relationship between the two leaders, and that such relationships will be necessary in tackling the shared issues faced by their respective, densely woven, economies.

"Much like the pandemic, these leaders today are again facing challenges that do not recognize borders," said Caranci.

"If there is a single takeaway from today's discussion and the Secretary's visit to Canada, it is that in the face of such headwinds, our two countries have decided that they will go much farther facing these challenges together with other like-minded allies."

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