President Donald Trump and China's President Xi Jinping (not shown) make a joint statement at the Great Hall of the People on November 9, 2017 in Beijing, China. Getty Images

The Trump administration's tariffs on $34 billion of Chinese imports went into effect at midnight, possibly triggering a trade war between the world's largest economic superpowers. And it could cause a serious ripple effect in foreign investing flows. Already, global foreign direct investment into the United States from China and other nations is on the decline. One reason has been trade war fears; another is uncertainty over U.S. policy. Although last week President Donald Trump backed away from a pledge to impose limits on Chinese investment into U.S. technology companies, he now wants Congress to decide whether rules around foreign investment should be altered. The fallout effect from all the rhetoric: China's dramatic pullback. According to a study released in June by Rhodium Group, a New York-based research firm, FDI — which it defines as completed acquisitions and greenfield investments made by a foreign company that can also include the purchase of real estate — fell more than 90 percent in the first half of 2017, to $1.8 billion. Chinese investors also sold $9.6 billion in U.S. assets, resulting in overall negative FDI flows from China to the United States. Another report, released in June by the U.N. Conference on Trade and Development, found that growth in FDI around the globe is on the decline. Global FDI flows fell by 23 percent in 2017, to $1.43 trillion from $1.87 trillion a year earlier. Flows to developed economies dropped by one-third, while investment into the United States fell by 40 percent, to $275 billion from $457 billion in 2016. While tariffs and trade may be dominating Trump’s Twitter feed and, at least in the last few weeks, roiling the markets — investors $12.4 billion out of global stock funds in June — FDI dramatically dropping is also a major cause for concern, said Mark Zandi, chief economist at Moody’s Analytics. “There are economic and long-run political ramifications,” said Zandi. “Globalization has lifted the financial well-being of billions of people. To pull back on that success is to everyone’s detriment.” That is one reason Asian stocks deepened their losses on Thursday, with major markets closing lower as investors became cautious ahead of the tariff deadline.

The fallout from an 'America first' strategy

There are several reasons why FDI is falling, but not surprisingly, antitrade rhetoric, more protectionist attitudes and investment-reducing policies is causing investors and companies to think twice about buying assets in foreign nations. It’s not as compelling to pour money into a country with an "America first, everyone else second" policy, for instance. “America first is an inherently inward-looking, not pro-globalization policy,” said Zandi. “Pulling back on TPP may be a pullback on trade, but FDI is also being affected by this sentiment.” Talk of a trade war is also making it more difficult for companies to plan — and this is especially true for Chinese companies. Trump has already implemented tariffs on $100 billion worth of goods, but he’s threatened to slap duties on $800 billion of imports. If the China-U.S. relationship worsens — and China has imposed its own tariffs on U.S. imports — then that could cause more companies to stay home. “Foreign investors are looking for both economic opportunities and political stability, and certainty the latter has suffered quite tremendously under this administration,” said Thilo Hanemann, a director at Rhodium Group and the author of its China FDI report, “Uncertainty is turning off foreign investors.” Stricter immigration policies could cause FDI to fall further in the future, too, said Zandi. Typically, FDI increases when migration to a country rises. Why? Because immigrants talk up where they live to people back home who then want to buy homes or businesses in the area. “Immigrants come to get to know a place, and then they say we should invest here, so money starts pouring in,” said Zandi. “People in the community can help manage or operate (a building) and they know what to buy.”

People protest the Muslim travel ban outside of the US Supreme Court in Washington, DC, on June 26, 2018. MANDEL NGAN | AFP | Getty Images

Lower FDI numbers are partly a result of immigration declines, said Zandi — more Mexicans are leaving the United States than coming into it, according to Pew Research, for instance — but if migration numbers fall more rapidly, then foreign investments could drop even further, too. “Having feet on the ground is critical,” he said. “A lot of FDI is geographically centered in places where there are a lot of immigrants. It’s self-reinforcing, too. If you have more FDI, then you have more immigration.”

Other trade war fears

It’s not just American policy, though, that’s causing global FDI to decline. In 2017 investments into Canada plunged to their lowest levels since 2010, according to Statics Canada. That’s related to fears over NAFTA and an outflow of capital from the country’s oil patch, but it also has to do with Canada wanting to put the brakes on foreigners scooping up real estate.

Over the last two years both British Columbia and Ontario have started taxing non-Canadians who buy homes in those provinces. The two governments have blamed foreigners and, more specifically, Chinese investors, of buying houses and inflating real estate markets. That’s likely contributed to a decline in FDI in the country, said Zandi. “Even the Canadians have turned a bit less interested in Chinese investment,” he said. China itself is also to blame for FDI declines. Between 2014 and 2016, the government started allowing more money to flow from the country to foreign nations. However, so much money started leaving the country that officials began worrying about how massive capital outflows might impact its own economy, said Rhodium's Hanemann.

Prime Minister Justin Trudeau of Canada. In 2017 investments into Canada plunged to their lowest levels since 2010, according to Statics Canada. Arindam Shivaani | NurPhoto | Getty Images

The impact of lower FDI

While FDI may not get the kind of attention that trade does, falling figures should be a concern for international investors and anyone who believes in globalization, said Bernard Wolf, an economics and international business professor at Toronto’s Schulich School of Business. “Both trade and FDI generally make the world a more efficient place,” he said. It can increase competition in markets, it brings people with new skills and knowhow to new countries and in the case of a merger of a public company, where one company buys another for a premium price, it can give investors a portfolio boost. “Globalization, including FDI, has enormous benefits,” he said. FDI also helps cooler heads prevail during conflicts, added Zandi. If countries are doing business with each other, they’ll be less likely to go to war with one another. “If your economic interests are aligned, and if we own a piece of their economy and they own a piece of ours, then everyone has skin in the game,” he said. “That’s a benefit we’re going to give up if we continue on this path.” In Zandi’s view, the timing for an FDI decline couldn’t be worse. As populations in emerging market countries move into the middle class, demand for developed market-made goods and services has never been higher. While he does say that globalization hasn’t benefited everyone, especially on the manufacturing side, more money will start flowing from China and other developing nations into America instead of vice-versa.

If your economic interests are aligned, and if we own a piece of their economy and they own a piece of ours, then everyone has skin in the game. That’s a benefit we’re going to give up if we continue on this path. Mark Zandi chief economist at Moody’s Analytics