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Trade war talk drives down cross-border investment

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Rising trade tensions are dragging down long-term cross-border investment by companies around the world, UN figures showed on Wednesday.

Global foreign direct investment fell by 23 per cent in 2017 and is expected to grow only modestly, if at all, this year, the UN said in its latest World Investment Report. 

Threatening this year’s picture are the growing prospects of a trade war between the US and China and the EU. The US last week imposed steel and aluminium tariffs on the EU, Canada and Mexico. It is due to release lists of tariffs and investment restrictions against China by the end of this month and is also threatening to impose import taxes on the $190bn of cars brought into the US from overseas annually. 

“The FDI growth this year will be fragile because of the trade tension and the geopolitical risks escalating,” said James Zhan, lead author of the UN report. “The uncertainty is huge this year and beyond this year the situation won’t be better.” 

One of the challenges facing the global economy, Mr Zhan said, is that FDI — a measure that includes acquisitions and investments in factories by foreign companies — has not yet recovered to the peak it hit before the global financial crisis a decade ago.

Last year, FDI around the world was $1.43tn versus $1.91tn in 2007. 

The past decade has also seen a stagnation in the growth of global supply chains. Data assembled by the UN Conference on Trade and Development (Unctad) pointed to the use of elaborate supply chains peaking in 2012. 

The Trump administration is trying to reduce international production, push US multinationals to relocate overseas factories to the US, and encourage new investment in the country by foreign companies that now produce outside of its borders. 

Corporate tax cuts approved by Congress last year were part of that strategy, but the administration is also trying to change trade incentives and erect tariff walls that force companies to increase US production. 

The policy has invited retaliation from other economies. Canada, China, the EU and Mexico have all threatened or imposed tariffs on US imports in response to the US steel and aluminium tariffs and promised more in the future if the US rolls out new duties. 

Such retaliation would undermine the attractiveness of the US as a place for companies to export from, undercutting the allure of the new lower tax rates, said Nancy McLernon of the Organization for International Investment, which represents foreign investors in the US.

“Isolationism in isolation might drive more investment in the US. But if other countries start responding then that is where you are going to start seeing a problem,” she said.

Monday, 4 June, 2018

One major source of uncertainty in the coming year is the auto industry. Mr Trump is trying to renegotiate the North American Free Trade Agreement with Canada and Mexico to force more production in the US and less in Mexico, which has become a major manufacturing centre over the past quarter century.

The US president last month launched a national security investigation into auto imports more broadly, setting the stage for the imposition of a 25 per cent tariff on cars brought in from Europe and Japan, as well as the Nafta countries. A decision could come within months. 

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