China’s direct investment (FDI) into the U.S. has collapsed since the election of Donald Trump. The numbers are staggering. FDI from China is now at its lowest level in 10 years.
When Trump was elected in 2016, China FDI was a record smashing $46.5 billion, more than double the 2015 record breaking year of $15.3 billion. But after two and a half years with Trump in command, China investments here went from $29.7 billion in 2017 to $5.4 billion in 2018 to an estimated $3.5 billion this year, based on numbers from the Rhodium Group.
Then there is Chinese visitors to the U.S. Their numbers accounted for more than 40% of international arrivals on a six month rolling basis back in 2012. Today their numbers are down 3%, and are a much lower percentage of total international arrivals, based on data from the U.S. Office of Travel and Tourism Industries and translated by data analytics firm Macrobond.
Call it a non-tariff barrier. The tit-for-tat trade spat between Beijing and Washington is having a great impact on cross-border business that, to date, has not been a target of tariff policy. FDI, however, is impacted insofar as Chinese tech companies are not allowed to invest in the U.S. based on national securities issues. This is especially true for telecommunications firms and even some financial services whose business model is primarily digital.
The Trade War’s Non-Tariff Barriers
Examples of non-tariff barriers include greater scrutiny on Chinese investment by the Committee for Foreign Investment in the United States (CFIUS), more restrictions on visas for Chinese students working on graduate degrees in the United States, tougher sanctions and compliance actions against Chinese officials and firms (notably Huawei), and — even worse — bipartisan efforts to de-list Chinese firms from U.S. stock exchanges.
BNP Paribas created an in-house economic model designed to attempt to measure the extra value ascribed to non-tariff barriers. They estimate the economic impacts based on 25% tariffs on all China imports would put the true value of the trade war at 28% to 37% hike in the cost of doing business, instead of 10% to 25% average cost increase, including those non-tariff barriers.
“Interestingly, this scenario would induce the nearly complete reversal of the trade opening achieved by China’s ascension to the WTO in 2001,” says BNP chief U.S. economist Daniel P. Ahn.
Uncertainty remains. Trump giveth. Trump taketh away. He could lose his re-election bid, giving the White House to a Democrat. The highest polling Democrat at the moment, Joe Biden, is considered Wall Street’s favorite for ending the trade war and a return to the status quo.
Trump’s latest tariff headlines and the Chinese central bank’s change in the yuan’s fixed rate may force corporations to finally concede that China tariffs are here to stay and gird for the long-run.
A May survey by the American Chamber of Commerce in China showed that 40% of respondents said they were remapping their supply chain out of China, or seriously considering it. That was three months before Trump announced tariffs on every Chinese import.
Not counting non-tariff barriers, Morningstar researchers said this week that average tariff costs for China goods will hit 17.5% next month.
Tariffs plus non-tariff barriers may have the effect of releasing some final delayed business decisions and purchase orders as businesses recalibrate their capital spending and value chain optimization plans before tariffs go up again.
Many investment firms are now assuming 25% tariffs across the board for China as their base case scenario.