The Trump administration's tariffs on $34 billion of Chinese imports went into effect at midnight, possibly triggering a trade war between the world's largest economic superpowers. And it could cause a serious ripple effect in foreign investing flows.
Already, global foreign direct investment into the United States from China and other nations is on the decline. One reason has been trade war fears; another is uncertainty over U.S. policy. Although last week President Donald Trump backed away from a pledge to impose limits on Chinese investment into U.S. technology companies, he now wants Congress to decide whether rules around foreign investment should be altered.
The fallout effect from all the rhetoric: China's dramatic pullback. According to a study released in June by Rhodium Group, a New York-based research firm, FDI — which it defines as completed acquisitions and greenfield investments made by a foreign company that can also include the purchase of real estate — fell more than 90 percent in the first half of 2017, to $1.8 billion. Chinese investors also sold $9.6 billion in U.S. assets, resulting in overall negative FDI flows from China to the United States.
Another report, released in June by the U.N. Conference on Trade and Development, found that growth in FDI around the globe is on the decline. Global FDI flows fell by 23 percent in 2017, to $1.43 trillion from $1.87 trillion a year earlier. Flows to developed economies dropped by one-third, while investment into the United States fell by 40 percent, to $275 billion from $457 billion in 2016.
While tariffs and trade may be dominating Trump’s Twitter feed and, at least in the last few weeks, roiling the markets — investors pulled $12.4 billion out of global stock funds in June — FDI dramatically dropping is also a major cause for concern, said Mark Zandi, chief economist at Moody’s Analytics.
“There are economic and long-run political ramifications,” said Zandi. “Globalization has lifted the financial well-being of billions of people. To pull back on that success is to everyone’s detriment.”
That is one reason Asian stocks deepened their losses on Thursday, with major markets closing lower as investors became cautious ahead of the tariff deadline.