That’s the theme of my latest Bloomberg column, here’s an excerpt:
In the Brexit debate almost a decade ago, it was occasionally suggested that higher trade barriers between Britain and the EU could lead to a beneficial increase in foreign direct investment, to activate the British market. So far Britain continues to stagnate, and foreign investment in the country has declined. To the extent that a country is not part of a country’s free trade system, it may be less desirable to invest there.
Now consider the US. It is a much bigger market than Britain, yet the Trumpian trade war will by no means reassure foreign investors. “America First” is a big part of Trump’s message, and foreign investors may fear that their long-term rights will not be fully respected under such a regime. In contrast, Ronald Reagan’s threat to Japanese auto manufacturers four decades ago was a small part of a broader commitment to the US as a (mostly) free-trade country.
Trump, it should be said, does not share that commitment. Under Trump’s tariff hike plans, the US would renege on all of its previous trade agreements, including with neighbors and major trading partners Canada and Mexico. Would anyone be surprised if Trump’s next move was to impose a higher corporate tax rate on foreign capital in the US?
Countries that have been successful in attracting foreign capital, such as Singapore and Ireland, tend to follow a similar strategy: They are reliable, predictable and keep their word.
Note also that the inflow of cash strengthens the dollar, which is not in every way compatible with Trump’s other objectives…
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