Make It Here in the USA! What the track record of attracting FDI into the United States implies for the Next Administration

For better or for worse, American politicians seem intent on reviving the American manufacturing sector so, it is said, to generate “good jobs” in “left behind” locales. Commercial policy is expected to play its part—inducing foreign direct investment through either carrots or sticks.

The Biden Administration started by offering carrots (subsidies) to private sector firms (domestic and foreign). Then, in May 2024, it raised import barriers on certain products to “protect” their state-encouraged investments. As I have written before, industrial policy is no longer about choosing between subsidies or tariffs, the U.S. variant of such policy mutated into subsidies then tariffs. Such complexities do not impress President-elect Trump. He has gone on record criticising the CHIPS Act subsidies, arguing that such subsidies reward foreign firms. Instead, he would raise import tariffs so high that foreign firms invest in plant in the United States.^[1]

Essentially, the President-elect has deployed the tariff-jumping hypothesis. That is, raising import barriers so that foreign firms switch their mode of supply from exporting (mode 1 in trade policy parlance) to foreign commercial presence in the USA (mode 3). Sticks will displace carrots.

The purpose of this briefing is to examine the last two U.S. Administrations’ track record in attracting greenfield FDI, so that readers can assess the likelihood of major shifts in how foreign manufacturers supply the U.S. market. My focus is on greenfield FDI rather than cross-border M&A because the latter is not immediately associated with plant expansion and job creation. Indeed, M&A is often a precursor to job losses, which is not what U.S. politicians say they want.

There is an academic literature on tariff-jumping as one driver among many of greenfield FDI decisions. Some studies find that higher import barriers are associated with more FDI inflows. Another prominent study investigated the impact of anti-dumping duties (which can be very high) on FDI inflows into the U.S. and found that the latter had greater impact on multinational firms from industrialised economies. Here I focus on the USA, drawing exclusively on recent official data.

If tariff-jumping FDI occurred in U.S. manufacturing sectors then some observed imports should have been replaced with inflows of capital used to establish new plants or expand existing ones. However, this is just one of four outcomes concerning observed changes in trade and FDI flows (see Figure 1).

FDI presence could rise along with trade increasing, so checking only for more greenfield FDI could be misleading. Moreover, greenfield FDI might be falling or growing more slowly than before 2017. Such changes may or may not correlate with reduced U.S. imports, the latter indicating potential market retrenchment. Which of the four outcomes in Figure 1 best characterises the situation of U.S. manufacturing during the Trump and Biden Administrations?

The U.S. Bureau of Economic Analysis reports the yearly Foreign Direct Investment position on a historical cost basis for 8 manufacturing industries. I calculated the cumulative annual growth in the sectoral FDI position before and after 2017, with 2018 widely recognised as the start of the U.S.-China Trade war. Moreover, I extracted information on U.S. imports in these manufacturing sectors from the UN COMTRADE database. Again, I calculated how much the trend rate of growth of imports changed after 2017.[2]

If imports were being systematically replaced by more foreign investment, all 8 U.S. manufacturing sectors would appear in the upper left-hand, green-shaded quadrant. In reality, only two sectors fit this pattern: the politically-sensitive transportation sector and the electrical machinery sector. FDI presence did grow faster after 2017 in metals but so did import growth, which is harder to square with a clean tariff-jumping FDI story or a subsidy-induced FDI dynamic for that matter.

That five of the 8 manufacturing sectors saw a slower rate of growth in FDI presence after 2017 (see the red shaded area of Figure 1) casts doubt on the effectiveness of both the Trump (sticks) and Biden (carrots-and-sticks) approaches to reviving U.S. manufacturing in part by repatriating production from abroad.

Figure 1: Only the transport and electrical equipment sectors saw import and foreign investment trends in line with the tariff-jumping narrative. Five sectors saw slower growth in invested capital. 

Figures 2 and 3 shed light on inward greenfield FDI decisions for four epochs: pre-2017, the initial years of the Trade War before the COVID-19 pandemic, the disrupted COVID-19 years where it is unwise to draw inferences about the impact of American carrots and sticks; and from 2022, when big-ticket U.S. subsidy schemes were enacted. Moreover, as these are multi-year investments, American officials collect information on current FDI outlays and planned outlays (which include current year outlays as well as expected spending in future years).

The black diamonds in Figure 2 show the total value of greenfield FDI commitments made in each year, including both current and expected future outlays. Both 2018 and 2022 (the first years when Trump and Biden’s new regimes actually kicked in) show increases. Interestingly, the new tariff regime of 2018 generated only a small increase in FDI commitments, up less than $4 billion. The year 2022 saw nearly $100bn in commitments, up from $17.5bn the year before. Tellingly, the commitments made in the next years (2019 and 2023) slumped. Regime shifts induced a sugar high among foreign investors. Momentum could not be maintained.

The blue line in Figure 2 shows greenfield FDI outcomes up to 2022 and then plans from 2023 on. The pre-2023 outcomes all lie in a narrow range—so it would be very hard to argue that the first Trade War changed foreign corporate decision-making much. Now that President-elect Trump has threatened to scrap key Biden-era subsidies, it is doubtful that the post-2023 reported planned expenditures will come to pass. Indeed, a survey by the Financial Times in August 2024 revealed that some 40% of IRA-related investment projects had been delayed or paused.

There is a warning here when interpreting headline US greenfield FDI commitment data—as the green line shows. Three-quarters of the nearly $100 billion FDI announced in 2022 was to be implemented from 2023 on. How much of that comes to pass will reveal the sensitivity of FDI decisions to policy regime change.

The red line in Figure 2 reveals how the FDI commitments made in the first year of the U.S.-China Trade War actually played out. This is telling as the shock and awe experienced now have parallels to that earlier time. Of the $35.3 billion in FDI inflows announced in 2018, a total of $30.8 billion was actually spent. In short, there was no overspend—in which first term Trump tariffs (that Biden chose to keep in place) resulted in upward revisions in FDI outlays. If anything, there was an underspend.

The sugar high can be found in data on the number of billion-plus US$ greenfield FDI projects recorded by the U.S. government, see Figure 3.[3] The total number of big-ticket projects that establish new facilities in the United States jumps in 2018 and 2022 when compared to the years before—and the number of such projects slumped afterwards in 2019 and 2023, respectively. See the red line in Figure 3.

Since these big-ticket projects are announced with much fanfare and tend to get a lot press, it is important not to be misled by them. The press tends to report when these deals are done and this may give the erroneous impression that a temporary change in foreign investor behaviour is permanent.

Big-ticket projects to expand existing plans (the blue line in Figure 3) exhibit some similarities with projects to establish new facilities. In both cases (expansion and establishment) the total number of big-ticket projects fell in 2019 after any tariff shock-induced sugar high in 2018.

In contrast, the number of big-ticket projects to expand existing facilities was higher in 2023 than in 2022. However, even the 2023 total involved just 7 new projects. In general, the total number of billion-plus USD projects of either type never reached 20 in any year. Either the number and value of foreign investment plans in U.S. manufacturing is grossly under-reported---I can find no evidence of claims that this is the case.

Or, although the CHIPS Act and IRA have generated significant attention, the actual economic impact is much smaller than initial projections suggested. Multiple stakeholders—including certain policymakers, corporate leaders, and media outlets—may have believed it was in their interests to emphasise the transformative potential of Biden’s subsidies.

Figure 2: Greenfield FDI investment commitments increased during the first year of the U.S.-China Trade War and when large American subsidy schemes were enacted in 2022.

Figure 3: Headline-grabbing Greenfield FDI projects jumped in 2018 and 2022 but momentum could not be sustained. But in both cases the number of standout investments is small.

The number and value of greenfield FDI projects in U.S. manufacturing is unlikely to be top of mind for American politicians. If their arguments are anything to go by, then it is the jobs created that matters. The U.S. government collects evidence on this too and the findings are surprising.

Again, focusing on greenfield FDI, as the blue line in Figure 4 shows, the total number of new jobs created each year by foreign investors is in long-term decline. The annual total has not exceeded 10,000 new jobs since 2014 and the total hit a low of 3,400 new jobs in 2021. Compare that to the approximately 13 million jobs that the U.S. Bureau of Labor Statistics reports are in the U.S. manufacturing sector.

A jump in planned jobs created did occur—to almost 51,300—in 2022. The 2023 planned total halved but is still above pre-2021 levels. However, in both years most of those planned jobs relate to future years—the green line shows that the number of jobs actually created in the years of announcement where less than 20% of the headline total of jobs created over the investment’s lifetime. With a question mark over the future of the Biden corporate subsidies, there must be doubts whether these promised jobs will ever be created.

Overall, neither Trump’s sticks nor Biden’s mixed approach led foreign firms to expand their manufacturing headcount in the United States to a degree that created significant job opportunities for Americans in “left behind” locales.

Figure 4: Very few new jobs are created by Greenfield investors—the 2022 blip breaks the downward trend but promised jobs may never see the light of day under the new U.S. Administration.

What would an economic nationalist keen to make their mark in the next Trump Administration make of these findings? It is unlikely that they would accept that the limited appeal of the U.S. market to foreign investors is related to the marked deterioration in U.S. competitiveness since 2016, evidenced in published international rankings. While many are in wonder at the U.S. tech sector, the reality is that skills, supply chain, and infrastructure deficiencies bedevil American manufacturing.  

Instead, our economic nationalist might conclude that, promises to reduce the trade deficit in goods and to repatriate jobs notwithstanding, tariff hikes are needed for other reasons. This could include raising revenues to pay for tax cuts that, in turn, might stimulate investment by U.S. firms.

Another conclusion an economic nationalist might draw—and Mr. Trump has hinted at this—is that the tariff hikes of 2018-9 were insufficient in two respects:

·        they weren’t applied across-the-board and ended up redirecting Chinese supply to countries with free trade agreements with the United States, and,

·        that the increases in import tariff rates need to be much larger to ensure foreign firms capitulate and invest in the United States.

Given both the supply side deficiencies mentioned earlier and the elevated risk caused by erratic U.S. public policy, it will be revealing to see how high prices have to rise in the United States on the back of import tariff increases for foreign firms to find production there sufficiently profitable.

Simon J. Evenett, an international trade economist, is Professor of Geopolitics & Strategy at IMD Business School, Switzerland. He is also Founder of the St. Gallen Endowment for Prosperity Through Trade, home of the independent monitoring initiatives Global Trade Alert, Digital Policy Alert and the New Industrial Policy Observatory and Co-Chair of the World Economic Forum’s Global Futures Council on Trade & Investment.