The FDI angle

• The opposition by US political leaders to Nippon Steel's $14.1bn takeover of US Steel on national security grounds is a proxy of their shifting sentiment towards inbound investment.
• Protectionist sentiment amongst the country's ruling elite is mounting, threatening its leadership as the driving force behind global trade and investment.

Why it matters: The US's shift from an opportunistic platform promoting open trade to one more cautious and oriented to domestic risk management could deter foreign investors, impacting FDI in critical industries and signalling a long-term retreat from global economic leadership.

Of all the surprises in the 2024 US presidential race, one may resonate more than others for the international business community. The uproar over Japanese group Nippon Steel’s attempted takeover of 123-year-old US Steel has been a rare example of foreign direct investment (FDI) thrust into the election spotlight. The saga has reached the highest echelons of politics, with White House candidates Kamala Harris and Donald Trump — plus president Joe Biden — publicly opposing the $14.1bn deal. 

Their statements foreshadow the potential use of presidential powers to block the deal on national security grounds. But doubts over the gravity of risks created by a long-term ally owning steel mills have sparked many to describe the pushback as a thinly veiled protectionist attempt to win blue-collar votes in battleground states like Pennsylvania, where US Steel is headquartered and operates. Simon Evenett, a geopolitics professor at IMD Business School in Switzerland, says that if blocking the deal on national security grounds is not protectionism, “I don't know what meets the definition”. 

From opportunistic to managing risks

Protectionism was a defining trait of the US’s economic policy between independence and the mid-20th century. 

After the second world war, the country championed a new, liberal, international economic order that was only challenged by the Soviet Union. That gained it a reputation as a bastion of free trade and investment, which found new momentum in the 1990s with the collapse of the USSR. The Nippon–US Steel controversy now sits awkwardly with that reputation. 

But the political pushback represents a high-water mark in creeping policy changes over the past decade — labelled ‘protectionist’ by critics and ‘economic security measures’ by proponents — that imperil its leadership in FDI and global trade. It also coincides with US government and fDi Markets data showing downward trends in the country’s inbound and outbound FDI flows. “There’s no question the US’s role in leading the international economy is changing,” says Matthew Goodman, a former White House and treasury department official now at the Council on Foreign Relations. “The question is, how far will it go?” 

He describes US foreign economic policy as once being driven by seizing opportunities, but now largely about managing risks. While some in Washington DC are still committed to an open economy, the debate is shifting such that risk aversion is now the dominant mood. “There are proposals that focus on managing risks first. If there’s any scope left for open trade and commerce then that's of course welcome, but the focus is really first and foremost on those risks,” Mr Goodman says.

Raising the drawbridge

On FDI, the government's focus on risk management is best revealed by the Committee on Foreign Investment in the United States’s expanding remit to scrutinise transactions with a tenuous connection to its original patch of military defence, as Nippon Steel is experiencing first hand. In the coming months, the government is expected to finalise the world’s first outbound investment screening mechanism for sensitive technologies; meanwhile roughly half of the country’s 50 states have passed laws restricting foreign ownership of private land. 

On trade, Washington DC’s new approach is epitomised by both the Trump and Biden administrations ratcheting up tariffs on geopolitical rival China. It culminated in May with the latter imposing duties on $18bn worth of Chinese imports to protect “strategic sectors” such as electric vehicles, steel and cranes. “Ten to 20 years ago that would have been controversial and many people would have pushed back,” but using tariffs this way is “now broadly viewed as more acceptable”, Mr Goodman says. 

The rise of American industrial policy — dirty words in DC policy circles just a decade ago — also extends to the more than $400bn in subsidies under the Inflation Reduction Act (IRA) and Chips and Science Act, and both Democrats and Republicans proffering a US sovereign wealth fund.

Another example of the US’s weakening dedication to a rules-based, open global market is its ambivalence towards several multilateral agreements, including those it spearheaded. “The US’s appetite to be tied down in reciprocal deals is zero at the moment,” Mr Evenett notes. Over the past five years, the country has repeatedly blocked the appointment of judges to the World Trade Organization’s (WTO’s) appellate board, leaving its 164 member countries no forum to dispute its decisions. 

After Treasury secretary Janet Yellen championed the concept of a global corporate minimum tax, the US has sat on the sidelines as more than 140 countries have committed to the OECD-led pact. A repeat occurred in July when some 90 countries agreed the first global e-commerce pact, negotiations for which the US kickstarted in 2019 but withdrew from last year. That’s despite its goals such as reducing barriers to cross-border data flow aligning with what the US advocated for in the United States–Mexico–Canada Agreement, says Xiaomeng Lu, director of geo-technology at Eurasia Group.

Given the lack of an international body governing digital trade, and the US’s huge stake in the e-commerce market, Mr Goodman says this last example is “really damaging to US interests”. 

Protectionism or economic security

While US economic policy is backtracking from its trademark opportunism, experts stress it’s unfair to compare its situation today with the post-war period when it became a leader of the open economy. “Yes, the US is getting more protectionist, but you have to understand the context,” says Victor do Prado, a geoeconomics professor at the Paris Institute of Political Studies and a former WTO official. 

Having suffered less damage than other Western powers following the war, the US spearheaded today’s global financial infrastructure — through, for example, the Bretton Woods institutions and WTO’s predecessor the General Agreement on Tariffs and Trade — and reconstructing Europe via the Marshall Plan. 

Eight decades later, that architecture has spawned the very different world in which the US finds itself. The country is grappling with competition from Asia’s manufacturing powerhouses; supply chain vulnerabilities exposed by the Covid-19 pandemic; climate change; deindustrialisation from offshoring and the green transition; and China’s rise as a geopolitical rival, with the world’s second-biggest economy propped up by a government that DC does not trust. “The US measures respond to this new world and hegemonic fight between the US and China,” says Mr do Prado.

Against this backdrop, Mr Biden justified his latest round of tariffs as a way to protect the country from China’s “artificially low-priced exports”. Similarly, the current administration justifies its export controls, investment screening and reshoring drive as ways to protect the health, prosperity and security of Americans against risks that market forces alone cannot fix. 

“Even within a pro-market approach to the economy, there are times when a government needs to step in to address a market failure,” says Sarah Bauerle Danzman, a professor of international studies at Indiana University. “That’s the way that the Biden administration is thinking about a lot of these issues. It’s just that there are more market failures that we hadn't realised before.” 

On disempowering the WTO appellate board, the US justifies its position through claims the current system needs reforming to prevent what it considers examples of incorrect interpretations of trade law and handling cases beyond its authority. But observers point to parallels between this decision and its sitting out of global tax and e-commerce pacts, namely that the US is backtracking on instruments it spearheaded while it was an uncontested power. “Once there is a contestant and the US is feeling threatened, they say at least some of these rules are no longer in my interest,” says Mr do Prado. 

Taken collectively, US protectionism and ambivalence towards multilateral agreements have been likened to the US having a midlife crisis. Its historical strategy of “running faster and faster” on innovation and output is no longer enough to compete at the same level internationally. 

But there are also societal reasons why the US government has become less outward-facing and placed a bigger priority on domestic matters. “The American people do not have the same confidence in, or understanding of, the US role as a leader of the international economy” and its benefit to their wellbeing, says Mr Goodman. It means the rise of populism and appealing to blue-collar voters, as the national security pushback to Nippon Steel’s deal shows, is also pushing these policies. “There's ‘internal politics’ fingerprints all over these measures,” says Mr do Prado. 

Strength in numbers

Despite protectionist-leaning policies, these do not dictate foreign investors’ interest in the US. “The government rhetoric is important, but perhaps more important are the [US’s strong] economic forces,” says Maggie Switek, an economist and senior director of research at the Milken Institute. The country placed fourth in the think tank’s latest Opportunity Index, which ranks countries’ FDI attractiveness based on variables from talent and transparency to economic growth. 

Data from both fDi Markets and Unctad shows the US continues to be the biggest source and destination of global FDI announced by multinationals, and economists do not see that changing any time soon. “US multinationals will continue to have a major role in global financial markets and FDI … and the [large] presence of foreign companies in the US will remain,” says the Brookings Institute’s Gian Maria Milesi-Ferretti. 

However, data shows cracks appearing in the US’s strong FDI flows. Its share of announced outbound FDI has dropped from 27% (project numbers) and 28% (capital expenditure) in 2003 to 17% and 14%, respectively, last year, according to fDi Markets.

While announced inbound FDI has maintained record highs since the IRA and Chips Act subsidies launched in 2022, US government data shows these are yet to translate into capital commitments. The Bureau of Economic Analysis (BEA) tracked $149bn of new FDI last year (expenditure to acquire, establish or expand in the US), the second-lowest level in a decade and around one-third of the $440bn in 2014. 

What is more, the money spent on expanding or establishing US businesses — rather than acquiring an existing business — over the past eight years is 40% less than the first eight years of this century. 

“Maybe the US isn't quite as attractive a place to do greenfield FDI as people actually think,” says Mr Evenett. 

BEA figures also show that reinvested earnings’ share of US total FDI financial flows has risen from 17.6% in 2016 to 66% last year, to the detriment of other forms of equity — namely new capital from abroad. On one hand, it shows that foreign firms that are well-established in the US are propelling inbound FDI as the US market continues to offer good returns on their investment. On the other, it suggests that would-be investors have been kind of sitting on the sidelines, says Jonathan Samford, executive vice president at foreign investor association Global Business Alliance. 

This weakening trend coincides with Reshoring Initiative statistics showing that since 2020, US firms have consistently reshored more jobs than FDI has created.

A sanguine election

As the November election draws closer, there are signs that irrespective of who wins the presidential race, reshoring and policies protecting US industries and supply chains will be a bigger focus than FDI and international trade. Being tough on China, a primary target of the past two administrations’ protectionist-leaning policies, is a rare area of bipartisan agreement. 

However, experts are quick to point out that Ms Harris and Mr Trump’s approach to managing these and other economic risks emanating from abroad would differ. Tariffs are the best example. With a policy-light campaign platform, the former is expected to continue Mr Biden’s use of tariffs to protect what are deemed strategic industries. Meanwhile, Mr Trump's pledge to impose a 60% duty on Chinese imports, and a 10% tariff on everything else, reflects “standard protectionism”, says Ms Bauerle Danzman. Even before making this pledge, José Manuel Barroso, former president of the European Commission, predicted a “serious possibility” of a US–Europe trade war if the former president wins the election.

Looking beyond the current political cycle, the Republican party’s tilt away from international economic engagement could continue under its heir apparent, JD Vance. Mr Trump’s running mate told the New York Times in June that trade and immigration, and the “post-war American order of globalisation” has damaged the country’s workers and economy. He also wants to break up Google, in line with his criticism of the size and power of big tech firms. It’s an ominous sign for FDI, given Amazon, Google and Microsoft are three of the six biggest sources of outbound project announcements, fDi Markets shows.

Despite the trajectory of both parties’ policy-making, and a fraying FDI record, neither commentators within nor outside the country are ready to call the end of the US’s heyday in the global economic order. The extent to which the country can manage its domestic problems, including deindustrialisation and other issues sparking DC’s protectionist sway, will shape its ability to be “forward facing in the global” economy, says Ms Bauerle Danzman. 

The view that the US is regrouping, rather than on a pathway to permanently retreating from international leadership, is shared by Mr Goodman. “In a decade or two … we may look back and say ‘we were too worried about all these risks, and we lost sight of our strengths’,” he reflects. He’s part of the camp hoping the old adage often attributed to Winston Churchill is true: Americans can always be trusted to do the right thing, after they’ve tried everything else.

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This article first appeared in the October/November 2024 print edition of fDi Intelligence