The FDI earthquake you probably missed, and what it signals for global trade
David Dodwell says some of the reasons for the 23 per cent drop in foreign investment worldwide last year – such as Trump’s tax reform and ‘America first’ protectionism – will persist for some time, and this means their impact should not be ignored
This investment earthquake meant that Asia was the world’s most important destination for foreign investment, with its share, steady at US$476 billion, accounting for 33 per cent of global flows (compared with 25 per cent in 2016). China (attracting US$136 billion) and Hong Kong (attracting US$104 billion) remain the world’s second- and third-most-important destinations for FDI, after the US.
Perhaps it should be no surprise that this dramatic news was missed. It appeared in what is among the world’s most boring “bibles” – the UN Conference on Trade and Development’s (UNCTAD) annual world investment report. As I plough through its 200 pages of turgid text and inscrutable tables, I believe I am one of a minority of human beings to ever turn its pages.
Yet its insights are fascinating. What could have happened to trigger such a precipitous fall in foreign investment – from US$1.87 trillion in 2016 to US$1.43 trillion last year?
The first reason is boring: there happened to be a number of international “mega deals” in 2015 and 2016 that inflated flows in those years. These did not happen in 2017, and so total FDI fell back.
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UNCTAD’s researchers says the tax measures will free up more than US$3.4 trillion in accumulated overseas retained earnings which could be repatriated. That could skew US FDI flows for some time to come.
Finally, the researchers noted that multinationals’ profit margins overseas are in decline. Average rates of return on foreign investment have slipped from 8.1 per cent in 2012 to just 6.7 per cent last year. In short, the profit-seeking incentive to invest overseas has declined quite sharply.
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This seems likely to encourage Chinese companies to shorten their production chains, bring more high-value-adding activity onshore, with an inevitable impact on international trade. This is not visible yet: world trade continued to grow last year. But the writing seems to be appearing on the wall.
“If tariffs come into force, trade and global value chains in the targeted sectors will be affected and so, consequently, would be efficiency-seeking FDI.”
Meanwhile, outbound investment from China also fell (for the first time since 2003) by 36 per cent – from US$196 billion to US$125 billion – for reasons we in Hong Kong noted only too well: “The result of policies … in reaction to significant capital outflows during 2015-16, mainly in industries such as real estate, hotels, cinemas, entertainment and sports clubs”. These curbs seem to have been relaxed of late, so perhaps we can expect an upturn this year.
Reading between UNCTAD’s turgid but information-dense lines, I sense some important shifts occurring that may have a long-term impact on trade and investment both in Asia and worldwide. You learned it first in the world investment report – if you managed to stay awake reading it.
David Dodwell researches and writes about global, regional and Hong Kong challenges from a Hong Kong point of view