KEJI - Key Inflection Points In The Global Trade System
2023-12-01 02:40:00 ET
Summary
- US direct investment abroad grew 3.3% in 2022, compared with the 5.0% growth rate attained in 2021 and a 10-year compound annual growth rate of 4.1%.
- US investors were bullish about new opportunities in India, Canada, and Mexico, while drastically cutting back on Russia and Japan.
- Should mainland China-US frictions persist, it would be reasonable to expect even deeper investment integration between Europe and the US.
Russia's invasion of Ukraine and ongoing trade and technology conflicts have given C-suites pause for consideration as they ponder new sourcing and go-to-market strategies.
Recently released foreign direct investment ((FDI)) figures by the US Bureau of Economic Analysis covering the 2022 period offer a trove of new insights about the state of globalization following these market-shaping events.
Overall, US direct investment abroad grew 3.3% in 2022, compared with the 5.0% growth rate attained in 2021 and a 10-year compound annual growth rate of 4.1%. US investors were bullish about new opportunities in India, Canada, and Mexico, while drastically cutting back on Russia and Japan.
Should mainland China-US frictions persist, it would be reasonable to expect even deeper investment integration between Europe and the US, and by extension, the rest of United States-Mexico-Canada Agreement (USMCA) to encompass Canada and Mexico.
Europe's energy disadvantage will persist for years as natural gas liquids infrastructure is gradually rolled out across the continent to address the deficit of cheaper Russian energy.
As a result, many businesses will be forced to examine strategic international mergers, acquisitions or investment stakes to solidify their domestic positions.
Asia-Pacific
Mainland China investors continued to exit US assets with a 7.2% cut in their investment position during 2022, preceded by declines of 15.9% in 2021 and 5.3% in 2020.
This appears to reflect political trends beginning with President Donald Trump's trade policy in 2018. Mainland Chinese investors curtailed US exposure by 2.8% in that year, followed by a 9.5% rebound in 2019 when a reciprocal trade framework was negotiated.
Mainland China's investment posture has undergone a remarkable shift, reinforced by an industrial self-sufficiency push and concerted technological development efforts.
US investment in mainland China grew by 9.0% last year to a new high of $126 billion, with investors loading up on positions in computers and electronics, information, and primary and fabricated metals.
US investors are structurally trimming their exposure to Hong Kong SAR and Macao. For the third straight year, direct investment in Hong Kong SAR contracted, now standing a cumulative 8.5% below the pre-COVID-19 level.
Investors heavily exited information and depository institution positions. The disappearance of US investment into Macao is more significant, at only one-fifth the peak level attained in 2015.
While investment into Taiwan posted a meager 2.7% gain 2022, the three consecutive years spanning 2019-21 witnessed steep decline. Consequently, the stock of US FDI in Taiwan is nearly 40% below the 2018 peak.
In August, the Biden administration issued an executive order restricting US venture capital and private equity investments into the Chinese sensitive technological spaces. The order has a particular focus on semiconductors, AI, and quantum computing.
Even for areas not specifically spelled out in the executive order, the overall effect should cool broader outbound US investment to mainland China, Hong Kong and Macao, dampening capital flows, implicitly raising the cost of capital, and arresting technological diffusion.
Beyond geopolitical tensions, wage differentials between Asian manufacturing hubs will become an increasing point of focus. At the end of 2022, manufacturing hourly wages in mainland China stood approximately 80% higher than those in India, and nearly double those of Vietnam, with the gap set to widen by decade's end. Consequently, incremental Western FDI will flow to these destinations as a means of supplier diversification.
US investment across South Asia soared in 2022 amid a general push by US firms to diversify supply chains, with the three primary beneficiaries being India, the Philippines and Vietnam.
In each of these locations, US inbound investment during 2022 was concentrated in manufacturing, and in the case of India, a heavy focus on information services.
Conceptually, it would be reasonable to expect US trade dependency with these locations to increase in the years ahead after the deployment of investment capital to build productive industrial and export capacity.
North America
The USMCA also appears to have sparked US investment in Mexico, with a 7.6% gain in 2022 on the heels of a 9.4% reading in 2021, reaching $130 billion this past year. The primary zones of interest center on computers and electronic products, electrical equipment and appliances, information, and wholesale trade.
These areas generally map to perceived points of vulnerability the US has with East Asian trade partners, indicating renewed US efforts to execute on supply chain resiliency initiatives.
Mexico's geographic proximity and labor cost advantage over mainland China has boosted its investment attractiveness despite security concerns, infrastructure challenges, and regulatory hurdles.
The latter are exemplified by Mexican government restrictions imposed in June 2021 on the use of third-party contract workers in manufacturing. By comparison, mainland China excels at scaling pools of labor to tackle demanding contract work, which is more difficult to accomplish in Mexico.
Europe
Europe remains the largest source of FDI into the US, but its share of the total has declined from a peak of 73% in 2010 to a 65% share at end-2022, reflecting larger Asian investments in the US.
Europe also attracts most US outward FDI and has become more of a focal point for US investors. European investments as a share of the total US investment position abroad grew from 54% in 2010 to 61% at end-2022 with the fastest gains recorded in areas such as Ireland, the UK, Denmark, Austria and Hungary. US exposure to Europe has been rising on both an absolute and a relative basis.
While there are few reference indicators at this stage, we forecast that energy-intensive European industries will expand investment overseas to hedge their operational stability and profitability to mitigate higher European energy costs, reflecting reduced Russian energy supplies and EU planned climate transition initiatives.
Concluding thoughts
Last year's FDI figures foreshadow a reshuffling of US political, economic, and financial orientation, and are likely to precede eventual changes in trade flows as seed capital is deployed to build the necessary infrastructure meant to downshift an overreliance on East Asian production toward a more diversified global supply chain.
It would be premature to look at world events and ascribe to them the end of globalization. If anything, the FDI and trade figures examined in this report paint a picture of a reconfigured, more resilient system under construction.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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Key Inflection Points In The Global Trade System