Foreign Direct Investment: Is the Glass Half-Empty or Half Full? | Trade and Industry Development

Foreign Direct Investment: Is the Glass Half-Empty or Half Full?

Nov 28, 2018 | By: Jerry Szatan

Recent data about foreign direct investment in the U.S. (FDI) is both a good and bad news story. The good news; total FDI stock reached a record slightly more than $4 trillion in 2017 according to Select USA citing U.S. Bureau of Economic Analysis (BEA) data. The bad news is that new FDI in the U.S. fell in 2017.

BEA reports that FDI in 2017 was 32 percent below 2016 (which in turn was less than the record year of 2015). Most FDI represents mergers and acquisitions which were down; but expenditures in 2017 for “greenfield” investments, which BEA defines as new establishments and expansions, fell to $6.5 billion in 2017 — $4.1 billion for new business and $2.4 billion for expansions — from $7.8 billion in 2016. While these totals include retail and residential, manufacturing accounted for about $1.6 billion of greenfield investment in 2017.

Foreign investment has been a key component of new facility investment in the U.S. in recent years and is eagerly courted by most states. The U.S. is a big, rich market that has grown faster than most of the developed world in recent years. Many foreign-owned companies that had been exporting to the U.S. decided that future growth potential made a direct U.S. location desirable; sometimes also exporting products. Today, disputes over tariffs, NAFTA and other trade questions cloud the investment outlook.

Some argue that new and proposed U.S. tariffs will spur FDI as international companies invest in the U.S. to avoid tariffs and remain competitive. There certainly is logic to that. But one thing economics teaches is to be alert for unintended consequences.

Some U.S. producers may use the tariffs to raise their prices, as U.S. steel companies seem to have done, perhaps equaling the tariffs and negating the potential price disadvantage for international competitors. Perhaps companies can shift production from China to countries in Southeast Asia or elsewhere, where many components already are fabricated. (I realize that the scale of assembly in China limits the potential shift to other countries.)

The potential economic boost in the U.S. may be offset by U.S. producers shifting their export production to facilities abroad when our trading partners retaliate with higher tariffs on U.S. products; notably Harley-Davidson announced plans to shift U.S.-based production for European market to other plants. Prominent U.S. companies have publicly warned that higher tariffs on their inputs, such as steel and aluminum, will make them less competitive internationally.

On August 15th, the Chicago Tribune reported that U.S. Steel announced plans to invest $750 million in its Gary Works, which the company attributed in part to the price support from tariffs. The Tribune also reported that a Chicago area manufacturer of steel vaults and cases will close two Illinois facilities with 150 jobs as the “Manufacturer moves operations to Mexico, in part to avoid tariffs” on steel.

We can’t discount that further potential retaliation by trading partners, perhaps driven by national pride may also slow foreign investment. A Wall Street Journal article (citing several possible reasons including heightened U.S. security concerns) on July 25th notes that Chinese investment in the U.S. has “plummeted.”

One thing we do know is that uncertainty is the enemy of investment affecting both international and domestic firms. As I write in late August, there are reports of resumed negotiations with the Chinese and with our NAFTA partners citing goals to head off trade wars: that seem to strike a hopeful note, so perhaps these issues will have been resolved and uncertainty will be reduced. Or the news may be different and less hopeful next week. We’ll see how it shakes out. T&ID

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