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Foreign Direct Investment Drops Ahead of Protectionism and Trade Wars

Foreign Direct Investment Drops Ahead of Protectionism and Trade Wars

Peter Hanks, Strategist

Talking Points:

  • UN says foreign direct investment fell 23% in 2017 compared to previous estimates of 16%
  • Global foreign direct investment now rests at $1.43 trillion, down from $1.87 trillion
  • US-led trade spats and Brexit are major factors weighing on the outlook for investment

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The United Nations Conference on Trade and Development released their World Investment Report, revealing global foreign direct investment (FDI) fell by 23% in 2017. Global FDI fell from $1.87 trillion to $1.43 trillion in the year as a collection of factors put downward pressure on the metric. The retreat in invsestment was heavily influenced by a 22% decrease in the value of cross-border mergers and acquistions. These large one-off deals led to an inflated FDI in 2016, but the decline in 2017 remained significant, officials from UNCTAD said. With the decline and continuing downward pressures of trade wars and protectionism, prospects for 2018 are further troubling.

Although many factors contributed to the decline in FDI, a few stood out. Firstly, UNCTAD officials noted that the negative FDI trend is caused in large part by a decrease in rates of return. The global average return on foreign investment is now at 6.7%, down from 8.1% in 2012. Return on investment is in decline across all regions, with the sharpest drops in Africa and in Latin America and the Caribbean. The lower returns on foreign assets also affect longer-term FDI prospects. Secondly, as a result of investment downturn, the rate of expansion of international production is slowing down. Finally, with trade wars and protectionism on the rise, a worrisome climate has emerged for global value chains.

A vitally important aspect for FDI, global value chains are taking a hit from the trade war waged by the United States with the implementation of steel and aluminum tariffs on key allies including Canada, Mexico, and the EU. Those same trade partners have vowed to impose their own retalitory import duties as leaders talk trade at the G-7 summit this weekend. Similarly, the UK contributed to the decline in FDI as the effects of Brexit begin to take shape and further disrupt value chains. Despite the tumultuous climate for trade and declining return on investment, UNCTAD believes FDI will increase marginally next year but remain well below the average of the past 10-years.

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