Weekly: Global Investment and Trade Wars
- UNCTAD data show that China, unsurprisingly, has the most robust net FDI track record
- Inward FDI to China, contrary to conventional wisdom, shows no sign of weakening
- Despite historic tax cuts and incentives, inward FDI to the US has weakened the last two years
- Tariff and non-tariff barriers are unlikely to change these trends, in our view
As we end a week full of drama around China-US trade frictions, the scenario of a world full of trade frictions is solidifying. As trade barriers go up, not only do the flow of goods across borders gets affected, outward investments suffer too, thank to associated uncertainty and costs. That this is taking place at a juncture when global investments flows are weak in any case is particularly worrisome. Looking at UNCTAD’s global investment data, we see that global FDI fell to 1.5% of GDP last year, lowest seen in decades. A weakening tech cycle, lowering of growth expectations in the G3, and a rise in economic nationalism may all have contributed to this trend. The ongoing China-US trade frictions will likely exacerbate this trend.
Beyond the overall global trend, the picture becomes more nuanced when the data from the US, EU, and China are examined. Unsurprisingly, the country with the most robust net FDI track record has been China, although as Chinese companies have begun investing outside, the net figure has declined. In contrast, net FDI to EU has been virtually non-existent, with inward FDI’s almost always being exceeded by outward investment flows. The US has also had an ordinary net FDI track record, although there has been some improvement in the trend since 2015.
The picture is most interesting when the data are isolated to gross inward flows. This series reveals the sentiment of foreign investors toward an economy. This again underscores robust flows to China in more than a decade. Strikingly, despite historic tax cuts and incentives, inward FDI to the US has weakened the last two years.
As tariffs spike and trade wars rage, it is unlikely that we will see a revival in the global investment downtrend. However, given China’s scale and competitiveness, global investment flows are unlikely to shy away, in our view. The US may also receive flows if growth continues to remain healthy and the investment environment is open. We are not as optimistic about EU though, given its myriad of cyclical and structural headwinds.
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