No, Foreign Investment Into the US Is Not Collapsing

Balding's World

My second biggest pet peeve at the moment is mangling data to fit your Trump rage syndrome when there are so many actual reasons to criticize the President.  Adam Posen at the Peterson Institute for International Economics is intent on reaching a conclusion he mangles any claim to accurate data analysis.

He makes the amazing claim that “Net inward investment into the United States by multinational corporations—both foreign and American—has fallen almost to zero.” Rather than simply try to overstate a misleading claim, he doubles down writing “this shift of corporate investment away from the United States” and “I developed in Foreign Affairs the potential emergence of a post-American world economy resulting from Trump’s aggressive bilateral bullying and abandonment of the rules-based international economic order.” I was intrigued and decided to investigate further the data and uncover the impending Trump collapse of America, let’s go to the data and see what it says.

Is foreign investment into the United States near zero or collapsing? No.

Foreign direct investment into the United States fell in Q1 2018 to $51.3 billion from $89.7 billion in Q1 2017 and $146.5 billion in Q1 2016.  This surely must be proof that the Trump presidency is killing foreign interest in the US as an investment destination right? Wrong. FDI in the US peaked in recent history in the second half of 2014 and Q1 2015 and has been trending down ever since (Look at the FRED data since 2010 here).  The key issue is that this has been a clear trend for about four years and not indicative of any political dislike of the president. If there is one thing we know from China: if a firm believes they can make money, there is no political demand too onerous. In reality, foreign investment into the US is right inline with long term trends since say 200 (Look at the FRED data since 2000 here).  In short, there is no collapse or move towards zero by foreigners interested in investing in the United States.

Did US owned FDI into the US decrease? No

In Q1 2017 US FDI abroad was $126.3 billion and collapsed to a negative $149.3 billion in Q1 2018.  This sure must be proof of the political problems of US investment being unwelcome abroad right? Wrong.  This is entirely due to profit repatriation by US MNCs.  Overseas holding company FDI flows show inflows into the US of $183.7 billion.  All other categories except finance which should a small negative number were positive.  Furthermore, the only geographic centers which should outflows back to the US were corporate financial centers like the Netherlands, Bermuda, and others.    I am very hesitant to attribute economic trends to any president but this this clearly not a trend. This is a result of legislation passed under the Trump presidency. Now we can clearly debate the economic wisdom, how the money is being reinvested, or the distributional consequences, but this specific flow should be attributed to the Trump presidency.

What other factors should we consider in looking at this data?

There is a mountain of actual data implying the data we are seeing is nothing more than trend data with statistical noise.  For instance, even in the slightly more than 18 months of the Trump administration, the stock of FDI in the US continues to rise pretty much on trend (FRED data here and here for longer view). FDI income is up 27% and 38% in Q1 2018 over the same period in 2017 and 2016 respectively.  Then there are specific business factors that are likely dampening the trend slowdown in foreign investment into the US.  For instance, the strong equity market (not attributing it to Trump just noting it exists) has likely lowered foreign acquisitions of US firms.  Add in a strong USD that began in the last quarter of 2017 making US investment more expensive, and this has also likely lowered FDI into the US.  For many US firms, the process works kind of in reverse.  Furthermore, foreign firms are choosing to reinvest earnings from US subsidiaries in the US rather than repatriate the profits hitting an all time high in 2017. For companies that are so scared of a Trump presidency, reinvesting all time high levels of profits (FRED data here) in the US is certainly a strange way of showing their concern.

I will admit to being a Talebist in that people, throughout economic and financial analysis, jump on one data observation and attributing it to ____ when in reality it is just noise around a trend.  This temptation has reached a fevered pitch around Trump and the trade war.  Not only is the data presented misleading, there is no reason to believe it is anything other than noise around a trend.

This was an anti-Trump rant in search of a misleading data point dressed up as rational economic analysis.  I do not support President Trump focus on ally countries, obsession with bilateral trade deficits, or chaotic scattershot approach to international economic relations.  I have written about this more than I care to, and my writings are quite clear on this.  However, Trump’s critics do the debate a profound disservice by presenting misleading data that is designed to fit a political opinion.  It is worthy of note that the US rate of FDI inflow is still growing roughly twice as fast at trend rate as China about and their supposed openness as written about by PIIE.