US protectionism harms emerging markets, US business interests

After five years of tepid global economic growth, the recent rise of populist and protectionist sentiments across the world pose additional headwinds going forward. With the election of President Trump and the potential for a more protectionist direction, it is important to consider how U.S. policy will impact growth outside of the U.S. and how those shifts may ricochet through the global economy back home.

President Trump ran on a “keep U.S. investment at home” platform, and the inaugural address and subsequent executive orders have shown that the new administration plans to carry out his campaign promises. Under pressure even in advance of Inauguration Day, companies including Ford, General Motors, and Carrier have announced plans to invest in U.S. plants in lieu of investment projects elsewhere — primarily Mexico.

{mosads}Regardless of whether this strategy succeeds in keeping business investment in the U.S. and bringing back manufacturing jobs, it bodes ill for a global economy — emerging markets, in particular — that look to the U.S. for investment and funding needs. That, in turn, reduces the market for U.S. exports.

An early warning sign of how protectionist policies could undermine economic growth is the flow of foreign direct investment (FDI) to emerging markets (EMs). FDI typically accounts for over half of all private capital inflows to EMs, brings a beneficial transfer of technology and knowhow in support of EM development. It also gives companies in the U.S. (and elsewhere) the ability to diversify their business models and tap into new markets.

Any slowdown in FDI is particularly noteworthy for a global economy that has spent decades becoming more interconnected. Indeed, there has been a conspicuous decline of late. We have now lowered our 2017 forecast for FDI flows to EMs to a new post-crisis low of $386 billion — about 30 percent below the 2010-2015 average, in part because of the impacts of potential new U.S. policies related to trade, immigration and taxes.

While more economic nationalist policies can have a large impact on FDI, a shift in the U.S. view from outward looking to inward looking can have substantial spillover effects on EMs through a variety of channels, such as trade, remittances, and domestic policies.

Protectionist policies in the U.S. and elsewhere could have a direct impact on trade volumes — a serious risk for many export-dependent business and countries. Tighter immigration rules could impact remittances, which play an important role in the economies of many Latin American and Caribbean countries.

Additionally, a more protectionist U.S. reduces the reward for sound economic policies in partner countries that have pursued economic liberalization and structural reforms on the back of free trade agreements with the U.S. With the U.S. appearing to take less of a global economic leadership role, an opening is emerging for other players to fill the role of promoting their own economic and trade agencies.

There are, of course, many drivers of the global economy, financial markets, and capital flows outside of the U.S. A year filled with contentious elections in Europe, and a general rise of economic nationalism throughout the world, pose many challenges as companies rethink their investment strategies in exceptionally uncertain times.

In this 21st century global economy, harnessing opportunities for free and fair trade, bringing those who are underserved and into the financial system, and working together to revive subdued global growth are efforts that require global participation.

The U.S., U.K., euro area, EM-to-EM trade, and FDI play a major role in the increasingly interconnected global economic framework and leaders around the globe should work to ensure the policies they are putting forward promote global investment rather than hinder it.

Ulrik Bie is a chief economist in the Global Macroeconomic Analysis department at the Institute of International Finance (IIF). Scott Farnham is a senior research analyst in the Global Macroeconomic Analysis department at the IIF. 

The views expressed by contributors are their own and not the views of The Hill.