There has been much focus on President-elect Trump’s now-mandated roll back decades of American bipartisan commitment to free trade.
Without delving into the politics of Trump’s positions, what does this all mean for foreign direct investment? What should nimble corporates be considering in the 6 – 12 months ahead? How can Government policy adapt to these uncertain times, and attract the interest of the expected global movement of capital?
Here are three likely impacts:
- Uptick of FDI into the US: as trade barriers go up, global firms seeking to access the massive US consumer market may need to set up shop within the US to ‘jump’ new tariffs. Likely investors would be Chinese, Korean, Japanese and even US-headquartered Mexican firms, who will bear the brunt of new tariffs under current plans. Also look for US firms accelerating the ‘reshoring’ of some facilities, a process which has already been underway for some time. As Trump reduces corporate income taxes across the board, look also for US States to start overhauling their investment incentive packages – state taxes, training packages, and other tools, to attract the global investment dollars.
- Uptick of FDI out from the US: China (in particular) has a history of retaliation (and a propensity for ‘pretaliation’) when faced with new trade barriers into the US. Any US manufacturers wishing to access the burgeoning middle class of China will need to establish a local presence in China or nearby markets with preferential access, such as Vietnam. When a period of uncertainty in global trade looms, the best global firms will be examining opportunities for localised production in multiple markets. Now is the time for Asian Governments to extend a warm welcome to US firms.
- Polarization of US and Non-US Supply Chains: historic low tariff barriers in global trade have led to an explosion in the trade in intermediate goods – parts and materials imported for further value-add, which are then sold domestically or exported. These imports and exports are often within the same corporate group. As of 2015, 20% of all US exports and 15% of all US imports are now intermediate goods, demonstrating the importance of US companies in global supply chains. Rising trade barriers globally will reverse this phenomenon, leading to polarization of companies deciding to whether to include – or exclude – US suppliers in their supply chains. Look out for companies investing and divesting internationally to reflect these choices.
The policy implications for Governments around the world – and the ramifications for corporates with global footprint or ambition – will take considerable time to emerge.
But having no plan for the wave of change about to hit – is perhaps the greatest risk of all.