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Home / Inside fDi / Inside fDi: Trade interference brings FDI/GDP divorce

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The mostly harmonious union between FDI and GDP was shattered in 2017, as foreign investment figures fell despite a strong economic performance. As Courtney Fingar discovers, it turns out that there was a third party complicating matters: trade.

After going together for years, FDI and GDP broke up in 2017. That’s one of the main revelations in The fDi Report 2018, our annual assessment of data and trends in greenfield FDI covering the previous year.

This decoupling was corroborated by the findings of Unctad’s World Investment Report. Despite global economic growth of 3.7% in 2017 and against our forecast, we tracked a 15% decline in greenfield FDI. Unctad reported a drop of 23% in headline FDI flows. Usually GDP growth translates into FDI growth, the two happily tracking along together in tandem.

What happened?

It looks like there is a third-party involved: trade. Major disruptions to the trade status quo helped drag down global greenfield FDI levels in a year that was expected to be a more positive one for FDI. And lingering question marks over major international trade pacts have the potential to hinder an FDI uptick in 2018 as well. Just as 2017 saw a decoupling of the usually solid union between global GDP growth and FDI, the next years will be dominated by the rocky relationship between trade and FDI.

Ironically, the source of much of the drama rocking the world trading system – the US – enjoyed a strong year for inbound greenfield investment, according to our figures.

What greenfield investors have seen so far in the way of FDI-related policies from the Trump administration they largely like: tax reforms will only enhance the US’s FDI appeal, as will red-tape slashing regulatory reforms. To the extent that the US’s trade policy becomes unstable or protectionist in a way that does not favour corporate interests (and a trade war most certainly does not), then the knock-on effects on FDI might come.

This we are seeing most visibly with the UK, which has rebounded somewhat from the dramatic drop in greenfield FDI experienced immediately after the referendum to leave the EU, but nonetheless witnessed a second year of decline after previously being among the world’s most reliable FDI performers. Access to markets and the UK’s future trade arrangements are top of the list of the uncertainties impacting UK FDI.

With tariffs now being lobbed across the Atlantic, and in many other directions, like missiles, there is not much reasonable expectation that troublesome trade barriers will stop interfering with FDI any time soon.

Courtney Fingar is editor-in-chief of fDi Magazine. Email: courtney.fingar@ft.com

To download The fDi Report 2018, please visit: http://report.fdiintelligence.com/ 

This article is sourced from fDi Magazine
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