The US under Trump: worth the risk?
The shockwaves caused by Donald Trump's victory in the US presidential elections are still being felt on a global scale, with foreign investors now having to reconsider the country’s risk profile. Philippa Maister assesses the situation.
Global corporations around the world are facing an unfamiliar question. Under US president Donald Trump, has the level of political risk in the US risen to a point where FDI should be reconsidered, or at least delayed? Once believed to be the ultimate ‘safe haven’ for investors, in the Trump era many long-standing assumptions about the US have been upended.
Perceptions of opportunity and risk vary by region and market, according to Iain Donald, a senior partner at global risk consultancy Control Risks, who has informally surveyed colleagues around the world. For example, though many Chinese companies cannot ignore the US market, their expectations and level of wariness have changed to a general feeling of uncertainty and jeopardy, he says. Some are considering more investment in Europe, even if it is not a big market for their products, to keep their options open in case they are not able to access the US.
And many fear that the Committee on Foreign Investment in the US – which reviews and can deny some types of foreign investment if it threatens US strategic interests – will take an even more stringent approach to Chinese deals in particular, of which Mr Trump has been critical. “I think Chinese companies will still pursue [deals in the US], but the size of the opportunity and the likely risk-adjusted rate of return will be much more relevant in their decision-making,” says Mr Donald.
Quinn K Zhao, a partner at Hill Wallack, a New Jersey-based law firm, says Mr Trump’s comments about China have caused some concern from his clients in the country. “However, I have not seen measurable consequences on the decision-making process of those companies,” he says. “The actual foreign policy toward China is not clear at this point. Their investments are more about returns, expanding their markets or improving their technology.”
Middle Eastern investors are disquietened by Mr Trump’s travel ban and negative comments about Muslims, adds Mr Donald. Nevertheless, they tend to take a long perspective and are unlikely to divest unless they feel long-term concern about the US economy, he says, adding that infrastructure represents one of the best opportunities for Middle Eastern investors.
Indeed, Mr Trump supports a joint US-Saudi Arabian programme to invest in energy, industry, infrastructure and technology potentially worth more than $200bn in direct and indirect investments within the next four years, in return for further US investment in Saudi Arabia and “the facilitation of bilateral trade”.
Europeans, meanwhile, are generally unimpressed. “Across the board, Europeans are extremely negative towards Mr Trump,” says Tycho Stahl, global commerce practice leader at Atlanta law firm Arnall Golden Gregory. Though most European companies welcome the president’s proposed corporate tax rate cuts, Mr Stahl says they worry about the rule of law and the stability of US institutions and trading relationships on his watch.
Hurting the brand
Mr Trump’s travel ban against six predominantly Muslim countries and perceived hostility to immigrants is also a concern to many companies, raising questions about the safety of staff and their ability to travel freely between the US and other destinations, and deterring some investment. In one case, an Iranian-born executive of a European company that Mr Stahl represents decided against FDI in the US because of the travel risk.
“These actions are rattling our brand as a stable democracy governed by the rule of law, and may discourage companies from investing in the US,” he says. He adds that some foreign companies may choose to set up a US sales office, which can easily be shut down, while holding off on more significant investment.
There are many reasons for this caution and concern. Mr Trump has threatened a tax of 35% on imports from Mexico, and 45% on those from China, and a general import tax of 5% to 10% is under discussion. He has also promised a 35% tax on foreign cars sold in the US. The Republican-controlled House of Congress has proposed a ‘border adjustment tax', which would deny US companies tax deductions on the cost of foreign imports.
These threats could stimulate FDI in the US as a means to avoid the taxes. But they could hurt both domestic and foreign companies that rely on supply chains in Mexico, China and elsewhere, and so discourage further US FDI, as well as raise costs for consumers and risk a retaliatory trade war.
Many legal experts believe both the border adjustment tax and import taxes would be illegal under World Trade Organization (WTO) rules, and Germany has already promised to challenge them in the WTO. However, one objective of the Trump administration’s 2017 trade policy agenda is to “resist efforts” by the WTO or others “to weaken US rights under various trade agreements”. The administration also has refused to “resist all forms of protectionism” or commit itself to free trade.
Despite these uncertainties, Mr Donald says that Control Risks has 'thus far' maintained its political risk rating for the US at ‘low’, while raising the UK’s to ‘medium’ since the Brexit referendum in June 2016. He says this is because after the UK leaves the EU, thousands of laws and regulations will need to be rewritten and government departments restructured. In the US, however, environmental deregulation or changes to the Dodd-Frank law, despite the range of possible longer term impacts, could make the US a less restrictive environment for companies to operate in for a time.
Ironically, if foreign companies hold back on FDI, the result could jeopardise a key plank of Mr Trump’s election platform, which is to bring back manufacturing jobs to the US. According to a 2016 Bureau of Economic Analysis report, “nearly 70% of FDI flows in 2015 and more than one-third of jobs at US majority-owned affiliates of foreign entities were in manufacturing in 2013”. Manufacturing employment at US affiliates constituted 18.8% of all US manufacturing employment.
How far Mr Trump will be able to carry his trade agenda remains to be seen. Infighting is reported between White House factions that support and oppose it. Meanwhile, the Washington-based Organization for International Investment (OFII), which represents the US subsidiaries of globally headquartered companies, is awaiting the final proposals and making the case to policymakers that foreign investors in the US fit very well with the America First agenda.
“These companies are taxpayers, good citizens of their communities, have deep domestic supply chains, produce 20% of all US exports, and employ 6.4 million American workers, so embracing FDI is a no-brainer,” says Aaron Brickman, the OFII’s senior vice-president. “It is clear that isolating ourselves from the 21st century economy is the wrong approach. Isolation will not make us more competitive.”
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