Trump 2.0 set to bring tougher times for global investment

Donald Trump’s re-election as US president, and the return of his ‘America First’ agenda, is likely to exacerbate a downward trend in global foreign direct investment, says Courtney Fingar.

Global foreign direct investment (FDI) flows had already been experiencing a downward trend in recent years, with geopolitical tensions, regulatory changes and market volatility contributing to a state of decline. Donald Trump’s re-election as US president is likely to exacerbate these challenges, as his protectionist policies and tariffs introduce further uncertainty and worsen global geo-economic fragmentation.

Trump’s first term in office marked a decisive break from decades of trade liberalisation. Under his administration, the US took a sharp turn towards protectionism, favouring bilateral trade deals over multilateral agreements. His administration’s ‘America First’ agenda sought to protect US manufacturing and jobs, sometimes at the expense of global partnerships.

A hallmark of his protectionist agenda was the implementation of tariffs on a wide range of goods, most notably targeting China, but also affecting numerous other trade partners, including the European Union and Mexico.

Trade war with China

His tariffs escalated into a trade war with China, which, according to estimates from the US Chamber of Commerce, cost American consumers around $38 billion annually in higher prices. At the same time, companies operating in the US faced higher production costs, leading some to reconsider their investment strategies in the country.

The negative ripple effect of these policies was felt worldwide. As tariffs pushed global supply chains to the brink, many countries began to reconsider their economic strategies.

The global reaction to Trump’s protectionist measures varied, but many countries moved towards counteracting such policies through the formation of new trade alliances. The European Union, for example, increased its focus on trade deals with Asia, the Middle East and Africa. Similarly, China ramped up its efforts to promote the Belt and Road Initiative, investing heavily in infrastructure projects across developing markets in Asia, Africa and Europe.

As these efforts intensify, the US could risk falling behind as an economic partner. Countries looking to diversify their trade relationships may opt for partners seen as more reliable and less subject to erratic policy shifts.

Climate of uncertainty

Trump’s tariff policies are also harmful to FDI. First, tariffs increase the cost of doing business for foreign investors in the US. Companies looking to invest in the US market, or those relying on importing goods from overseas, are faced with higher import duties and costs associated with compliance and logistics. For multinational corporations, this means higher production costs and potential disruptions to supply chains.

According to a 2019 report from the National Bureau of Economic Research, the US tariff hike during the trade war with China resulted in a 0.3% reduction in US GDP, illustrating how protectionist policies undermine economic efficiency.

A key attraction for global investors in the US market has historically been its access to global supply chains. However, Trump’s tariffs disrupted these supply chains, forcing companies to seek out alternatives that are not subject to the same trade restrictions.

Second, Trump’s tariff policies fuel a broader climate of uncertainty, which is a major deterrent for FDI. The unpredictability of his approach to trade means that companies face an unstable regulatory environment. Political and economic instability is a key driver of reduced FDI flows; with Trump at the helm, the US might appear to be an unpredictable partner for foreign investors, making them hesitant to commit to large-scale investments that require long-term stability.

Global investment flows impacted

The US is both the top destination country for FDI, and the top source country. So any major changes to the US’s FDI paradigm will impact global flows.

Protectionism has already been steadily increasing worldwide, with both trade and investment measures reflecting a shift towards nationalistic postures. This global trend towards economic nationalism has created a challenging environment for cross-border investment and trade, signalling potential long-term impacts on global economic integration. Protectionism reduces international market access, undermining the very purpose of FDI.

This global trend will surely be accentuated by Trump’s return to office, creating a real risk of a race to the bottom when it comes to policies for trade and investment.

Courtney Fingar is the founding partner of Fingar Direct Investment and editor of RealFDI

‘The trend towards economic nationalism has created a challenging environment for investment and trade.’

Courtney Fingar