FDI, not tariffs, are the key to US bringing manufacturing back

Instability and unpredictability are anathema to investors, so the Trump administration’s tariffs will have a huge impact on inward investment. Instead, it should focus on attracting FDI, say Martin Kaspar and Douglas van den Berghe.

Donald Trump’s economic policies famously centre around trade deficits and tariffs as a way to solve them. With the US president imposing tariffs on virtually all major trading partners, policymakers and economists are warning of a global trade war with huge repercussions for many economies (including the US).

Yet in this emotional debate, a more crucial element is entirely overlooked: namely the role of foreign direct investment (FDI).

If his real, underlying ambition is to re-establish the US as a global manufacturing hub, his heavy-handed trade-protectionist approach (dating back to the late-19th century models of Ricardian economies), does more harm than good.

To succeed in bringing manufacturing back, Trump would get much further by improving the attractiveness of the US as an investment destination, rather than doing his level best to alienate non-Americans. Arguably, imposing tariffs will not bring manufacturing back and help reindustrialise the US.

Started by the Obama administration (and continued by the Biden administration through the passing of the Chips Act and Inflation Reduction Act subsidies), a drive to bring manufacturing back to the US is already underway. So the bigger question is, have these past policies succeeded? And why, or why not, have they succeeded? Some would argue that the reindustrialisation of the US is indeed already happening, while others are more sceptical.

Below, we look at how companies perceive the US investment climate and the overall business environment for FDI. Just how attractive is the US for inward investment?

Location factors

Companies contemplating investment in a location typically consider a variety of so-called location factors. These include the level of taxation, political stability, infrastructure, and the availability and cost of skilled labour. Considering that a typical investment and location-decision process within large companies can take up to two years, a significant lead time must be taken into consideration.

While Trump’s corporate tax cuts during his first administration made the US a more appealing investment destination, it is still a high-tax country (there is a reason why Apple and others all decamped to Ireland, or elsewhere).

While Trump frequently speaks about rebuilding America’s infrastructure, his first administration largely failed to deliver a comprehensive infrastructure overhaul that would have enhanced the country’s competitiveness. Infrastructure is typically a long-term game and competitors like Germany and China have made slow, but consistent and significant, progress.

Lack of skilled labour

Equally, many companies feel there is a lack of skilled labour in the US, which requires development of the workforce through long-term policies that focus on education and a steady supply of labour. The Trump administration, however, is associated with restrictive immigration, even for highly skilled workers, and plans to dismantle educational infrastructure. Compared with Mexico, US labour is more expensive, with relatively little output difference at the blue-collar level (again, there is a reason why most US firms decamped south for labour-intensive processes).

Additionally, the state of infrastructure in a number of states is far from world-class, or even what one might reasonably expect of one of the world’s leading nations.

Maybe the biggest problem at present, however, is the unpredictability of trade policies and the intensifying ongoing tariff wars. If investors dislike one thing above all else, it is political, policy and regulatory instability and unpredictability. Erratic policy shifts, such as the sudden imposition of tariffs, are jeopardising supply chains.

Long-term commitments discouraged

Decisions to abruptly renegotiate NAFTA (the North American Free Trade Agreement between the US, Canada and Mexico and now presumably USMCA), create uncertainty, which discourages sunk-cost, long-term commitments (aka greenfield FDI), which is exactly what all his policies allegedly aim towards.

Trump’s attempt to force companies, via protectionist measures (tariff jumping/access to the market), can force some corporates – with a clenched fist in their pocket – to invest. The much bigger price, though, would be the entire business community, which should be enticed with predictable policies and an attractive business environment, to invest voluntarily. His adversarial stance on trade and constant threats of imposing new tariffs, only sends mixed signals to global investors.

To make the US the epicentre of manufacturing, to have investors queuing at the door, there needs to be a change of course. Instead of imposing tariffs, the US should focus on making the investment climate of the US great again.

Martin Kaspar is head of business development at a German mittelstand company in the automotive industry. Douglas van den Berghe is founder of NxZones, a global network of special economic zones, technology parks and eco-industrial parks.