Companies cool on foreign direct investment calls, writes John Whelan.
Executives around the world are cooling to the idea of investing internationally in the face of a rising trade tariff war between the US and China, and renewed US sanctions on Iran and Russia, as well as the EU uncertainty created by the looming prospect of a ‘no deal’ Brexit.
In its half-yearly assessment of foreign direct investment, the Organisation for Economic Co-operation and Development found that foreign investment flows had plummeted by 35% in the first half of this year.
According to the OECD, at the end of last month, Ireland was one of the big losers in the falloff in foreign direct investment.
It reported for the first half of the year decreases to Ireland, Switzerland and the US, with each economy dropping by more than $50bn (€44bn) and largely accounting for the overall decrease in investment to the OECD area. Foreign direct investment inflows to the OECD area, which accounts for over three quarters of global trade, reached their lowest levels in five years.
The falloff is primarily due to the large repatriations of earnings by US parent companies from their foreign affiliates because of tax reform in the US.
The 2017 US Tax Cut and Jobs Act contained several provisions that have had immediate and likely long-term impacts on direct investment.
One key provision was the one-time tax on undistributed foreign earnings. This allowed US parent companies to repatriate cash held overseas in their foreign affiliates without additional taxes beginning in 2018.
Estimates of the amount of overseas cash held by US multinationals vary, but all indications are that it is substantial. Many corporations have already taken advantage of the low tax return option.
This repatriation by US parents caused large, negative investment flows from Ireland and led to negative overall inflows of investments.
The short-term impact of these repatriations on the foreign operations of US multinationals is likely to be minimal as they involve the sale or disposal of financial, as opposed to real, assets.
While these repatriations show the immediate impact of US president Donald Trump’s tax policies on foreign direct investment, the longer-term effects are difficult to predict due to the complexity of the international trade and uncertainty about how other countries will respond with counter measures.
Nevertheless, the US Tax Cut and Jobs Act has changed the incentives for US corporations to invest back home as opposed to in Ireland or other global destinations and the impacts could be significant and long-lasting.
In the first half of 2018, China was the largest recipient of foreign direct investment inflows worldwide at €112bn, followed by the UK at €58bn.
However, both of these countries could face significant declines in foreign investment over the coming years. In the case of China, the escalating trade war with the Trump administration has already seen a 10% tariff on an additional $200bn of goods exported to the US imposed in September and is now facing a further increase to 25% from January.
The long-term impacts are difficult to predict.
However, the strong investment flows into China recorded this year were mainly negotiated in 2016 and early last year and are unlikely to continue in the current trade climate.
Global business executives will be very reluctant to commence either fresh greenfield investment or merger and acquisition negotiations while the governments keep changing the rules of international trade.
Meanwhile, the publication last week of the first round of the UK government’s ‘technical notices’ in preparation for a potential no-deal Brexit was poorly received across Europe and in particular by the DUP in Belfast.
For all their detail, these documents only serve to highlight the gaping void facing the UK, and will only add to the reticence of business to investment.
IDA Ireland, which has a third of all its investment promotional offices in the US, may have to rethink its strategy.
John Whelan is managing partner of The Linkage-Partnership, an international trade consultancy with offices in Ireland, Holland and Switzerland
