Xi Jinping’s reelection will boost the ‘friend-shoring’ trend in the West—but that’s a risky move

On Saturday, Xi Jinping will most likely be reelected as head of China’s Communist Party, tacking another five years onto his hard-line tenure. Whoever else comes and goes in the Politburo Standing Committee, back in Washington there’s growing sentiment that it’s time to move from economic integration to containment of China. But what does that mean for U.S. business?

One possible consequence is that the U.S. and its NAFTA and EU trading partners could move decisively to so-called friend-shoring, a doctrine in which any product—from electric vehicles to microchips to oil and gas—would need to come from countries that share the U.S.’s values and principles. It would mean an end to trading with Russia and China, and down the line, perhaps even some OPEC members.

Among Western leaders, “friend-shoring” certainly is gaining momentum. This week, Canada’s Deputy Prime Minister Chrystia Freeland said that “friend-shoring is here” and that Canada “should aim to have [economic] dependency with a fellow democracy.” In the U.S., Treasury Secretary Janet Yellen already said in July she favored increased trade with “trusted” allies. And last week, the Biden administration showed what that meant in practice: It banned U.S.-based companies from selling advanced microchips to China.

Companies with a high exposure to China and other nondemocratic countries might hope that the obsession with “friend-shoring” will blow over. But public sentiment could also shift more permanently to protectionism. As FT columnist Rana Foroohar noted this week, “The fact that both Republicans and Democrats are rethinking trade policy says something important: The idea that trade was primarily a pathway to global peace and unity…is over.”

On the bright side, one place where U.S. manufacturers will find more goodwill than ever is Germany. The two countries are respectively each other’s fifth and first trading partner, and if current sentiment is a guide, the relationship can still grow. According to a recent Pew Research survey, a record 82% of Germans say relations with the U.S. are good, and both U.S. Republicans and Democrats see Germany as a partner on various matters, from energy to the environment and in dealing with Russia and China.

Has the era of “friend-shoring” truly begun then? As a lover of history, I would add one note of caution to the hurrah sentiment, and it’s this: Over the centuries, golden eras of global powers tended to coincide with times they were trading with each other. It was true for the Roman and Chinese empires in ancient times, for Britain and the U.S. in the 19^th century, and indeed for China and the U.S. until now.

Conversely, empires tend to decline when they turn to autarky, or restrict themselves to protectionism or mercantilism. It may be one reason why some U.S. investors and entrepreneurs, such as Ray Dalio and Elon Musk, continue to favor trade and integration with China amid the changing tide. To find out why, you can listen to Dalio’s Leadership Next interview with Alan Murray, recorded last month, on Apple or Spotify.

More news below.

Peter Vanham
@petervanham
peter.vanham@fortune.com

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This edition of CEO Daily was edited by David Meyer.